ALL PLEASE which we will treat here as the long-run interest rate. Question 2.5

Question

ALL PLEASE

which we will treat here as the long-run interest rate. Question 2.5 [3 points] Consider the system of equations that describe our short-run model In the equations above, correctly replace R1, and RID with either R'] or R Question 2.6 [5 points/ Remember that under the expectations hypothesis, short-term and long-term interest rates are related through t1 Use this relationship to substitute out the long-run interest rate from the system of equations in question 2.5. Then proceed as usual substitute out R and derive the AD equation (for now, leave the short-run interest rate R for period t+ 1 in the AD equation) plug in the policy rule into the IS curve to

Explanation / Answer

Ans 2.5 The solution is as:

put value in the equation

The solution will be provided to you.

Ans 2.6 The value is as

2, 2.5

where 2 = R

And 2.5 = t

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