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ECN 410

Problem Set 3

Due Wednesday 11/2

1. Use the DD-AA model to answer the following. Make sure to show the original effects in the goods or asset markets that drive the changes in e and Y in the DD-AA total market:

a) The Fed temporarily contracts the money supply to curb inflationary pressure during an expansionary period of the business cycle. 

b) The government in response to a recession pass a temporary tax cut.   

c) The domestic economy falls into a recession.

2. How does the effectiveness of fiscal stimulus change when a country fixes its exchange rate? Illustrate using the DD-AA model and explain.

3. Suppose China enters a recession. How would such a business cycle shock abroad spillover to the US? How does the fact that China fixes their exchange rate impact the spillovers? Illustrate and explain.

4. In response to Covid-19, the Fed is rapidly expanding its balance sheet.

a) How are they doing this? Describe the process of a central bank expanding its balance sheet.

b) What are the consequences of such a central bank policy? What is the goal?

c) Is such a policy sustainable indefinitely? How do you know?