Consider following Philips Curve.
∆πt = ν¯Y˜
t + o¯
a. Draw Philips curve. (x-axis: Y˜
t
, y-axis: ∆π) What is the slope and y-intercept of the curve?
b. What is the impact of the ν¯ change? Should government perform a more aggressive policy to
stabilize the inflation rate with high ν¯ or low ν¯? If so, why?
c. Suppose there is an inflation shock because a war increased oil prices. (o¯>0) What is the
impact of the oil price shock? (Use Philips curve graph)
Question 3. Consider policy rule, IS curve, and Philips curve
P olicy rule ∶ Rt − r¯ = m¯ (πt − π¯)
IS curve ∶ Y˜
t =
1
1 − x¯c
[a¯ − ¯b(Rt − r¯)]
P hilips curve ∶ πt = πt−1 + ν¯Y˜
t + o¯
a. Derive Aggregate Demand(AD) and Aggregate Supply(AS) curve, and draw AD and AS curve.
What is the slope and y-intercept for AS and AD curve?
b. Find steady state inflation, π
∗
, and output Y˜ ∗
c. Suppose there is a positive and temporary demand shock, because of the new technology
development. (a¯>0) What is the impact of this shock?
Question 4. Consider a production function
Yt = F(Kt
, Lt) = AK¯ α
t L
1−α
t
(1)
and the resource constraint
Yt = Ct + It + Gt (2)
and the capital accumulation equation
Kt+1 = It + (1 − ¯d)Kt (3)
Consumers consume a certain fraction of the output so the consumption equation is
Ct = (1 − s¯)Yt (4)
The government spending Gt
is a fraction of capital stock, so with the higher capital stock, there
is more government spending.
Gt = gK¯ t (5)
Assume there is no population growth, so Lt = Lt+1 = L¯
2
a. Derive a Solow-Growth model and describe the intuition of the equation.
b. What is the key assumption in this model
c. Find the steady state per-worker quantities of capital, output, and consumption
d. Draw the Solow model (the x-axis is Capital stock, the y-axis is output)
e. Suppose there was a big government spending. Therefore, g¯ increased. What is the new
steady state per-worker quantities of capital, output, and consumption?

Sample Solution

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