Macroeconomic Analysis for International and Public Affairs U6401
Problem Set 7
Due on April 2 at 6:00pm
1. Please drop your homework in mailboxes 7 or 10 in the 6th-floor mail room, close to the Office of Student Affairs.
2. You only have to submit ONE homework paper per group.
3. Please make sure you write both first and last names of each group member on the first page of the homework paper.
4. While your answers should be typed, you do not have to draw the graphs in Word or Excel.
Just take pictures of your hand-drawn graphs and paste them to your problem set paper before printing
In this question, assume that Brazil is a closed economy.
The table below illustrates some indexes of real macroeconomic data from Brazil (1995 = 100).
Gross Domestic Product 172 168 166
Personal Consumption Expenditures 180 177 174
Gross Private Domestic Investment 176 161 155
1. During this time, is Brazil experiencing a recession or an expansion?
Consider the following alternative explanations for the Brazilian cycle during this time.
First Explanation: The Brazilian cycle is only driven by a drop in consumers’ optimism about the future.
Prices are sticky.
1. Illustrate the short run effects of this shock on the goods market graph, the asset market graph and the
IS-LM-FE graph. Indicate with A and B, respectively, the equilibrium before and after the shock.
2. Which of the variables on the table above are consistent and which are inconsistent with the first
Second Explanation: The Brazilian cycle is only driven by a contraction in real money supply.
1. Illustrate the effects of this shock on the goods market graph, the asset market graph and the IS-LM-FE
graph. Indicate with A and D, respectively, the equilibrium before and after this shock.
2. If a curve shifts, explain – in no more than one line -why it shifts
3. Which of the variables on the table above are consistent and which are inconsistent with the second
1. Using an IS-LM-FE graph (and this graph only) illustrate the combined short-run and long-run effects of
an i. exogenous reduction in full employment GDP (due to a drop in oil prices)1 together with ii. an
exogenous reduction in consumption if the combined two shocks cause P to increase in the long run.
Assume that, before these two shocks, the Brazilian economy was at full employment. Indicate with A,
B and C, respectively, the equilibrium before the two shocks, the short-run equilibrium and the long-run
2. Under these circumstances, can you unambiguously predict the effects of these two shocks on
investment in the long run (from equilibrium A to equilibrium C)? Explain (there is no need to draw
During 2015, Banco do Brasil – the Brazilian Central Bank – implemented a monetary policy to prevent prices
from increasing in the long run.
1. If this policy was attained through open market operations, should Banco do Brasil have...