Assignment
Monetary Policy 1
Problem 1 If the economy has lots of HtM people and the gov increases the
debt now, what will happen to the IS curve? Compare to an economy without
HtM people, what is the di¤ erence and why?
Problem 2 Derive the IS curve
Suppose we introduces the investment into the model.
Yt = Ct + It + Gt
Let ac , aI to denote the consumption and investment shares on the trend ( YC
and YI ). And suppose that
Ct = C
bC (rt
r) C
It = I
bI (rt
r) I
(a) Please explain the intuition why the consumption is negatively related
with r
(b) In the last equation, we actually assume that aggregate investment is
also negatively related with r, can you explain why?
(b) Derive the IS curve
(c) Suppose people suddenly becomes not so patient, how the IS curve will
move?
1