Question

True, False or Uncertain (24 points).

State whether the claims in these statements are true, false or ambiguous and explain why. You

must provide an explanation to receive any credit. Drawing graphs and arrows only will yield

minimum credit.

a. “In the Mundell-Fleming (IS*-LM*) Model with fixed exchange rates, a contractionary

monetary policy will have no effect on output in the long-run.” (8 points)

b. ““Suppose that the equation for the Phillips curve is π = πe – 3(u - 0.06) + ν. Assume that

inflation last year was 3 percent, current unemployment is 7% and that there is no supply shock

in the economy. Assuming adaptive expectations, then the current inflation rate must equal 3

percent.” (8 points)

c. “A positive supply shock will shift the Phillips curve to the right.” (8 points)

Answer 1

A) under fixed exchange rate fiscal policies have high influence on bop but in the case of flexibile exchange rate monetary policy is more effective and fiscal policy is ineffective so it's true.

C) yes! It's true if. A positive supply shick will shift the aggregate supply curve to the right and the Philips curve will go down.