HARVARD UNIVERSITY

                       DEPARTMENT OF ECONOMICS

ECONOMICS 10b SPRING 2015

                    Problem Set #7 (OPTIONAL!)

 (due TO YOUR SECTIONLEADER'S MAILBOX by 3 p.m. on Monday, May 4th)

1. A country's macroeconomy begins in LR equilibrium. The country is an open

   economy. A permanent fall in consumer confidence reduces aggregate demand.
   
   a.     Using both an AS/AD diagram and a money market (liquidity market)
   
          diagram, explain the SR and the LR effects of this fall in consumer
   
          confidence. Assume no changes in either monetary or fiscal policy in the
   
          aftermath of this fall in consumer confidence. Even as the...