B. Short answer (25 marks total) Answer each of the questions in Section B. Answers should...

B. Short answer (25 marks total) Answer each of the questions in Section B. Answers should typically be no more than 2-3 sentences in length.

1. In the Mundell-Fleming model, what are the two endogenous variables that appear in the goods-market equilibrium condition (after substituting in all relevant functions, e.g., C = C(Y ? T), etc.)? How does this compare to the case in the (closed economy) IS-LM model? Be sure to explain the reason for any differences

2. Briefly describe how “debt deflation” works; that is, how this mechanism might cause an unexpected fall in the price level to produce a large fall in output (e.g., in the Great Depression).

3. Consider the IS-LM model, and suppose G increases by ?G units. In general equilibrium, does output increase by more, less, or the same amount as µG × ?G (where µG is the government spending multiplier introduced in chapter 10)? Be sure to explain why this is the answer.

4. Suppose domestic inflation is positive (? > 0), foreign inflation is zero (? ? = 0), and the central bank is operating a fixed exchange rate (%?e = 0). What, if anything, will happen to the real exchange rate ? Be sure to explain in words what is going on.

5. In the context of the Solow model, explain briefly how the current level of capital k affects the change in the level of capital from today to tomorrow (i.e., if k were higher, in what ways would that affect ?k). Be sure to explain all of the effects.

Expert Solution

Rahul Sunny answered 2 years ago

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