Economics 3012
SPREADSHEET EXERCISE 3
OUTPUT AND PRICES
In this exercise you will be using five equations of our model: IS, LM, AD, MAS and SAS. The
IS curve is not used directly, but it is implicit because the AD curve is derived from IS and LM
solutions. EXCEL won’t solve simultaneous equations, so the exercise uses the solution given in
Notes III-D. I use here the same numbers as on Problem Set #7. I caution you to do the algebra of
Problem Set #7 first! You will need to be able to do that algebra on the final exam. Use this SSEx as
a check of your algebra.
Why then use EXCEL at all? Because it shows the process of convergence (or not as is the case
with accommodation), much more clearly than does the algebra, because with EXCEL it is as easy to
do 100 time periods as 2. Here I will have you do 25 time periods.
The exercises also has you find the interest rate, i. This isn’t used; it is there just for your
information. There is no investment function, but you know that as i goes up, I goes down, and viceversa. You might want to refer to them in your short paper.
All exercises begin with full employment, Y = Yn = 1000 and a constant Price Level of 1.0. There
is an expansionary fiscal policy. You do this twice: in Part I with no accommodation, and in Part II
with an accommodating monetary policy.
Part I
First load in the names of each column and the initial conditions.
A1 is “time”. In A2 type “0”. In A3 type “=A2+1”; copy A3 to A4:A27.
B1 is “A”. In B2 type “800”.
C1 is “M”. In C2 type “50”.
D1 is “Y”. In D2 type “=.8*1.25*B2+.8*5*C2+200-200*1”. In D3 type
“=.8*1.25*B3+.8*5*C3+200-200*E2”. MAKE SURE THAT’S E2, NOT E3! Copy D3 to
D4:D27.
E1 is “P”. In E2 type “1.0”. In E3 type “=E2+(D3/1000-1)” Copy E3 to E4:E27.
F1 is “Int”. In F2 type “=.02*D2-.1*C2/E2”; copy F2 to F3:F27.
The government increases G which increases A to 900 and holds it there. The government holds M
constant.
In B3 type “900”. Copy B3 to B4:B27.
Copy C2 to C3:C27.
In E3 type “=E2+(D3/1000)-1”. Copy E3 to E4:E27.
Round P and i to three decimals, and Y to one decimal. To what values are Y, P and i converging?
Part II
Now the Government is going to follow accommodating monetary policy. It’s easier to use some
new columns. Just copy and paste the entirety of what you have above, which is Columns A-F and
rows 1-27, and Paste it to Columns H-M, still rows 1-27.
SSEx: Output and Prices
page 2
The government increases G which increases A to 900 and holds it there. The government sets Mt
=M0Pt-1 . Make just one change:
In J3 type “=50*L2” MAKE SURE THAT’S L2, NOT L3! Copy J3 to J4:J27
Again, round P and i to three decimals, and Y to one decimal. To what values are Y, P and i
converging? Or are they?
Write out your answers, print the spread sheet, and turn both in. These are due in class Tuesday,
April 4.