Short answer: Answer each of the questions in Section B. Answers should typically be no more than 2-3 sentences in length.
1. In the Mundell-Fleming model, what are the two endogenous variables that appear in the goods-market equilibrium condition (after substituting in all relevant functions, e.g., C = C(Y ? T), etc.)? How does this compare to the case in the (closed economy) IS-LM model? Be sure to explain the reason for any differences
2. Briefly describe how âdebt deflationâ works; that is, how this mechanism might cause an unexpected fall in the price level to produce a large fall in output (e.g., in the Great Depression).
3. Consider the IS-LM model, and suppose G increases by ?G units. In general equilibrium, does output increase by more, less, or the same amount as µG à ?G (where µG is the government spending multiplier)? Be sure to explain why this is the answer.
Short answer: Answer each of the questions in Section B. Answers should typically be no more than 2-3 sentences in length.
1. In the Mundell-Fleming model, what are the two endogenous variables that appear in the goods-market equilibrium condition (after substituting in all relevant functions, e.g., C = C(Y ? T), etc.)? How does this compare to the case in the (closed economy) IS-LM model? Be sure to explain the reason for any differences
2. Briefly describe how âdebt deflationâ works; that is, how this mechanism might cause an unexpected fall in the price level to produce a large fall in output (e.g., in the Great Depression).
3. Consider the IS-LM model, and suppose G increases by ?G units. In general equilibrium, does output increase by more, less, or the same amount as µG à ?G (where µG is the government spending multiplier)? Be sure to explain why this is the answer.
