Question

Using IS-LM, graph and explain the effects of a decrease in wealth. Make sure to include the Money graph and the Keynesian Cross.

Answer #1

(I) IS-LM Model

A decrease in consumer wealth will decrease consumption expenditure. This shifts the IS curve leftward, which decreases both interest rate and output.

In following graph, IS0 and LM0 are initial IS and LM curves intersecting at point A with initial interest rate r0 and output Y0. Decrease in consumption spending shifts IS0 leftward to IS1, intersecting LM0 at point B with lower interest rate r1 and lower output Y1.

(II) Keynesian Cross

When consumption falls, the consumption function shifts downward and aggregate expenditure (AE) line shifts downward, decreasing equilibrium output.

In following graph, initial equilibrium is at point A where
initial planned aggregate expenditure line PAE0 intersects
45^{0} line with equilibrium aggregate expenditure E0 and
output Y0. Lower consumption shifts consumption function downward,
from C0 to C1, which shifts the PAE line downward to PAE1,
intersecting 45 line at point B and decreasing equilibrium output
to Y1 and decreasing aggregate expenditure to E1.

(III) MD-MS

Decrease in output will decrease money demand. This shifts money demand curve leftward, reducing interest rate.

In following graph, MD0 and MS0 are initial money demand and supply curves intersecting at point A with initial interest rate r0 and quantity of money Q0. As money demand falls, MD0 shifts left to MD1, intersecting MS0 at point B with lower interest rate r1.

Using the IS-LM model combined with the AD-AS model, show and
explain the effects in the SR and LR from a decrease in the money
supply - assuming nothing else exogenous changes. Be certain to
explain how and why variables change and include graphs.

Show on graph (using the aggregate demand and aggregate supply
model) the effects of: A decrease in aggregate demand/recession
(show what happens both in the short run and in the long run and
make sure you explain your results)

Consider a closed economy, make sure to include an
explanation. Using an IS-LM-FE framework analyze the consequences
of the following event according to a Real Business Cycle
economist. Total factor productivity temporarily declines (adverse
supply shock).

Graph the effects of oil price increase in the IS-LM-PC model.
Explain, in words, whathappens to unemployment and inflation?

2. Show the effect of a decrease in the price level on the LM
curve and explain the reasons for the changes you made. Only one
graph is required. (10 pts.) Note: While only one graph is
required, detailed discussion of the money market is required. If
you include a graph of the money market, in your answer, it will be
“graded” unless you use the OMIT option as mentioned in class.

Consider the Keynesian model with a flexible price level and
flexible money wage. Using the IS-LM and AD-AS diagram, explain the
effects on output, priceand interest rate,given an increase in
government spending.

Using IS-LM analysis, illustrate the effect of a decrease in the
money supply on equilibrium interest rate and output. Explain what
you are illustrating in your diagram and why the curve(s) are
moving.

1. Using the IS-LM graphs, explain what will happen to output
and the interest rate if consumers suddenly become pessimistic and
decrease their consumption spending at all levels.
2. Using the IS-LM graphs, explain what will happen to output
and the interest rate if financial panic leads to an increase in
the demand for money.

What happens if the Federal Reserve Bank decreases the money
supply? Make sure to include the appropriate equation, the money
graph and the Short-run/long-run goods graph and discuss how this
impacts GDP, P, and Unemployment in the Short-run and the long
run.

1. Consumers’ using cash in transactions more frequently in
response to an increase in identity theft
For each shock,
Use the Keynesian Cross and Theory of Liquidity preference to
explain the shifts in IS and LM curve
Use the IS-LM diagram to determine the effects on
Y and r.
Figure out what happens to C,
I, and the unemployment rate.
Your explanations must include graphs with
appropriate labels for axes and curves.

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