Question

Consider a **closed-economy IS-LM model**. Assume
initially the economy is at **medium run
equilibrium**. Discuss with the help of graphs the effects
of a decrease in consumer sentiment for **output, interest
rates and price level** in the short run as well as in the
medium run. Be sure to explain how the economy transitions from
short run to the medium run.

Answer #1

Aggregate demand = Consumption + Investment + Government Spending + Exports - Imports

If there is lack of consumer cofidence in the economic system, tehy would consume less of the goods which will reduce the aggregate demand in the economy. It will reduce the price level from P to P1 while output level falls frm Y to Y1 in the economy and shifting the economy from point A to B.

As aggregate demand is reduced, it will shift the IS curve to its left reducing the rate of interest from i to i1 as well as output level from Y to Y1 in short run.

In medium run, to raise the aggregate demand Fed will raise the money supply in the economy which will shift the LM curve to its right. They will raise money supply such that people have more money in their hands which will rase their willingness to pay for the goods and raise the overall demand in the economy.

It will cause rate of interest to fall further to i2 and output level to rise to its initial level at Y.

In medium run, producers will respond to fallen demand as reduced demand will create inventories if producers does not reduce their supply of goods. It will take the price to its initial level of P while it reduce the output level further to Y2 level.

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Rake of Interest? um Lm. - Ev I ut ---- JE Output level

Consider the closed-economy model.
(a) Suppose the economy is initially in long-run equilibrium
with Y = Y¯ , r = ¯r, and P = P1. Draw IS-LM and AD-AS diagrams
showing this equilibrium.
(b) Suppose the economy is then hit by an adverse supply shock,
which causes P1 to jump up to P2 > P1. Using Keynesian cross and
money market diagrams, explain what will happen to the IS and LM
curves in the short run as a result of...

2. Aggregate demand
a. Write down the AD relation.
b. Use the IS-LM model to derive the AD curve. What could cause
the shift of AD curve?
3. Monetary expansion
a. Assume the economy is initially at Yn. Draw the AD-AS model
and label the initial equilibrium as A. Draw the corresponding
IS-LM model and indicate the equilibrium A.
b. Suppose now there is a monetary expansion. Show the short run
effect on price level, output, and interest rate in...

Suppose that a closed economy is in a steady state equilibrium
in the long-run. If there is a decrease in the depreciation rate of
this economy, discuss what will happen to the steady state
equilibrium, output per worker and capital per worker in this
economy. Graphically show and explain the developments by clearly
labeling your graphs.

Consider the following Keynesian (short-run) model along with
the Classical (long-run) model of the economy.
Labor Supply: Le = 11
Capital Supply: K=11
Production Function:
Y-10K.3(Le).7
Depreciation Rate: &=.1
Consumption Function: C=12+.6Yd
Investment Function: I= 25-50r
Government Spending: G=20
Tax Collections: T=20
Money Demand Function: Ld=
2Y-200r
Money Supply: M=360
Price Level: P=2
Find an expression for the IS curve and plot it.
Find an expression for the LM curve and plot it.
Find the short run equilibrium level of...

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...

Suppose that the government of an economy that is in its
long-run equilibrium gives out money to most of the residents.
Using the IS-LM and AS-AD model, describe both the short-run
effects and the long-run effects of the following changes on
national income, the interest rate, the price level, consumption,
investment, and real money balances. Make sure to use both words
and figures.

2) Consider the following Keynesian model of the economy.
Consumption Function: C = 12 + .6 Y d,
Investment Function: I = 25 − 50 r,
Government Spending: G = 20,
Tax Collections: T = 20,
Money Demand Function: L d = 2 Y − 200 r,
Money Supply: M = 360,
Price Level: P = 2.
a) Find an expression for the IS curve and plot it.
b) Find an expression for the LM curve and plot it.
c)...

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,...

13. Suppose there is an increase in government spending in a
closed economy. In medium-run such a fiscal policy will cause:
none of the other answers is correct.
ambiguous effects on the neutral real interest rate
the nominal wage to rise
no change in the neutral real interest rate
the neutral real interest rate to rise
14. Suppose the economy is initially in the steady state.
According to Solow model without technological progress, an
increase in the depreciation rate (δ)...

Use the IS-LM model to graphically illustrate the impact of a
sudden decrease in demand for money (due to an increase in the use
of internet banking) on the output and interest rate in an economy
in the short run. Write down the impact on Y, C, U and
I.
Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium levels; iv. the direction the curves shift; and v. the
new short-run equilibrium.

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