The AA-DD Model under Floating Rates
Note that in this model, investment is dependent on the interest rate. Otherwise, the equations should look standard.A. Floating Rates - Temporary Shocks: restart;B. Floating Rates - Permanent Shocks: restart;Variable Names: Y - nominal GDPAssignment: 1) Using Maple, solve for the above two models. Because the system is nonlinear in some variables (i.e., the exchange rate ER), there may be more than one set of solutions, and you will need to pick the right set. You will know which is which by the solution values. First, solve for the initial equilibrium. Then in each case: a) Increase GOV from 1900 to 2000.2) In each of the above cases, explain your results with words and appropriate graphs (i.e., the E-R-M and AA-DD models), and explain the directional change of the main endogenous variables (Y, IR, ER, CAB). In which cases did having endogenous investment change the predictions of the model, relative to the version of the AA-DD model taught in class? |