econ 302
Econ 302 991
Fall 2014
Assignment #2
October 9, 2014
Note: The rst two questions are fairly broad and are meant to evaluate your understanding of the key macroe-
conomic frameworks we have studied so far. Answer them with extreme care. Be careful of plagiarism; your work
cannot closely mimic another student's submission.
1. In the long-run, the nominal interest rate is determined by a number of macroeconomic fundamentals. Write
the formal model of nominal interest rate determination and describe how the various macroeconomic variables
aect nominal interest rate. In elaborating how the variables aect nominal interest rate, you may need formal
models (graphs and equations) to explain each of the variables you link to nominal interest rate (25 points)
2. Use the formal model of nominal exchange rate determination to explain how various foreign and domes-
tic macroeconomic variables aect exchange rate. The linkages have to be clearly indicated (using formal
equations and graphs, when possible). (30 Points)
3. Explain how expected ination aects the actual price level. Use a formal model and explain using intuitive
reasoning (15)
4. The dierence between short-run and long-run theoretical frameworks are simply hinged on one key assump-
tion. What is this assumption and how does it imply the key dierences between the short- and the long-run
frameworks?
1