Using a Keynesian model of an open economy explain what happens to Y, L, K, W/P, C, I, r, i, P, MD (Money Demand), Nx when money supply in the economy increases. Please explain the intuition behind the changes in variables as well as the proper order in which they change.

Answer the following questions!

1)

a)Using a Keynesian model of an open economy explain what happens to Y, L, K, W/P, C, I, r, i, P, MD (Money Demand), Nx when money supply in the economy increases. Please explain the intuition behind the changes in variables as well as the proper order in which they change.

b) Using multiple graphs; explain why Monetary Policy is sometimes less effective than Fiscal Policy and vice versa. In addition, give an intuitive explanation to your findings.

c) Using multiple graphs or a graph; 1) explain why both Monetary Policy and Fiscal Policy might be ineffective at the same time. In addition, give an intuitive explanation to your findings.

2)

a) Assuming we have an elastic labor supply. i.e. a horizontal Labor Supply Curve. Using a classical model of an open economy explain what happens to Y, L, K, W/P, C, I, r, i, P, MD (Money Demand), e, E, Nx(Net exports) when Labor Demand increases. Please explain the intuition behind the changes in variables as well as the proper order in which they change.

b) Now assume that Labor Supply is no longer only a function of (W/P) but rather a function of (W/P) and consumption C. i.e.

1

LS = 10 + 10

.W .

+

P

.1 .

4

C (1)

Using a classical model of an open economy explain what happens to Y, L, K, W/P, C, I, r, i, P, MD (Money Demand), Nx when government purchases increase. Please explain the intuition behind the changes in variables as well as the proper order in which they change.

EC 441

FINAL

Time

Y

i

e

2010

100

5

1.2

2011

120

4

1.15

2012

130

3

1.12

2013

140

2

1.1

3)

a) Using a classical model of an open economy explain what happens to Y, L, K, W/P, C, I, r, i, P, MD (Money Demand), e, E, Nx(Net exports) when Labor Supply increases. Please explain the intuition behind the changes in variables as well as the proper order in which they change.

b) Is this data consistent with a classical model of an open economy? For full credit please explain in detail. i.e. When the nominal exchange rate is falling that means it is depreciating.

4)

a) What are the main differences between a classical model and a Keynesian model? Is the classical model that we have been studying a good model to explain what happened during the great depression of 1929 and the great recession of 2008 in the United States or, is the Keynesian model a better model to explain what happened during the great depression of 1929 and the great recession of 2008? i.e. How would a Classical economist explain what happened and how would a Keynesian economist explain what happened?

b) What data would you like to have to see which one of these models is better? How would you interpret your findings based on this data? i.e. name the type of data you would like to have (variable names, over how long of a period, how many countries, what relationship between the variables do you expect in a Classical model vs. a Keynesian model, etc.)