Question

Use the IS-LM model to show what happens to output and the interest rate in equilibrium. Briefly explain how equilibrium is adjusting in the goods and/or money markets. One IS-LM graph is necessary for each part. Clearly label your graph for full credit.

(a) The central bank increases the money supply

(b) The government increases transfers to households

(c) The stock markets are booming and household wealth increases

Answer #1

Consider the closed-economy model.
(a) Use IS-LM and AD-AS diagrams to show what happens to the
economy in the short-run, long-run, and during the transition,
following an adverse supply shock . Explain in words what is
happening.
(b) Suppose the central bank wishes to achieve output stability;
that is, suppose the central bank would like to keep Y from ever
changing. In response to the change in P from the adverse supply
shock, what, if anything, can the central bank...

1) Equilibrium output will rise and the equilibrium
interest rate will fall if :
A) government spending increases B) net exports increase. C)
there is an autonomous increase in money demand D) the Fed
increases the money supply
2) In the IS/LM model
A) the money supply is always fixed B) consumptions expenditures
are fixed C) the price level is fixed D) the level of real GDP is
fixed
3)Changes in monetary
policy shift the LM curve, while changes in...

6. Consider the IS-LM model. The central bank uses the interest
rate as its policy instrument. Illustrate and explain the impact of
the following shocks on the equilibrium values of real
income/output, money stock, consumption, and investment.
A. The non-bank private sector lowers its currency holdings.
B. Households increase autonomous saving
C. Default risk premium declines

IS/LM ALGEBRA Showing your work, solve for the equilibrium
interest rate and output level given the following: C = 400 +
0.5(Y-T) I = 800 – 100r G = 300 T = 200 (M/P)d = Y – 750r (M/P)s =
1000 Now let government expenditures (G) fall to 200 to balance the
budget. Re-compute equilibrium r and Y. Illustrate with IS/LM graph
including the original equilibrium conditions. Label everything on
your graph.

For each of the following situations, use the IS-LM-FX model to
illustrate the effects of the shock. Please explain how you
obtained your answer (do not just state the effect). For each case,
state the effect of the shock on the following variables (increase,
decrease, no change, or ambiguous): Y, i, E, C, I and TB. Assume
the government allows the exchange rate to float and makes no
policy response.
1. The money supply increases.
2. Government spending increases.
3....

For each of the following situations, use the IS-LM-FX model to
illustrate the effects of the shock. Please explain how you
obtained your answer (do not just state the effect). For each case,
state the effect of the shock on the following variables (increase,
decrease, no change, or ambiguous): Y, i, E, C, I and TB. Assume
the government allows the exchange rate to float and makes no
policy response.
1. The money supply increases.
2. Government spending increases.
3....

1. Show what happens to Y and r using the IS-LM model when
a) There is a decrease in money demand
b) Congress reduces government spending
c) There is an increase in consumption spending by househol

Use the money demand and money supply model to show the money
market in equilibrium with an interest rate of 5 percent and the
quantity of money of $800 billion. Suppose the Federal Reserve
increases the money supply to $850 billion. At the previous
equilibrium interest rate of 5 percent, will households and firms
now be holding more money or less money than they want to hold, and
will they be buying or selling short-term financial assets? At the
new...

1. In the short-run IS-LM model with income taxation, taxes are
given by ?=? +??. Suppose that MPC = 0.75 and the marginal tax rate
?=0.2. Then, when ? decreases by 1000, then for any given interest
rate, the IS curve shifts:
Select one:
a. to the left by 1000.
b. to the right by 3000.
c. to the right by 3750
d. to the right by 1875.
2.
Suppose that the adult population in an economy is 28 million,...

Suppose the Indian central bank (RBI) increases its target
overnight interest rate. In doing so it is clearly trying to
increase interest rates in the money market (and throughout the
economy).
(b) The central bank can change the money supply through an open
market operation. In this case, should it buy bonds from, or sell
bonds to, the banking system? Briefly describe how this changes the
amount of deposit money in the system. If the necessary change in
the
PLEASE...

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