Question

Explain what will be the shape of the LM curve in a liquidity trap. How will...

Explain what will be the shape of the LM curve in a liquidity trap. How will the LM curve shift if there is in increase in the money supply? Would fiscal policy be effective in changing the equilibrium output?

Homework Answers

Answer #1

liquidity trap is a situation in which the interest rates are so low that they cant be decreased further in order to target increased output, any increase in money supply wont affect the interest rates which are already extreme low, the LM curve is horizontol at this rate of interest, rhus any kind of help is what we can get from fiscal policies, as there is an increase in government ependings or decrease in taxes the IS curve shifts outwards increasing both the output and the interest rates and help the economy and the central bank to get out of the trap.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
How can the Fed influence the location of the LM curve and the interest rate? To...
How can the Fed influence the location of the LM curve and the interest rate? To help answer this question, assume that the demand for real balances is given by (1) (M/P)d = 0.5Q ‑40i and that money supply is initially fixed at (2) (M/P)s = 400. (since prices are fixed you may assume P=1). If money supply were increased to 500, and real output Q were constant at (3) Q = 1600, How would the intercept of the LM...
What shape does the LM curve take when the central bank fixes the interest rate instead...
What shape does the LM curve take when the central bank fixes the interest rate instead of money supply? How does monetary policy work in such an economy?
Illustrate and explain what happens to the LM curve when prices increase? What is happening in...
Illustrate and explain what happens to the LM curve when prices increase? What is happening in the money market that causes the LM curve to shift?
1) Equilibrium output will rise and the equilibrium interest rate will fall if : A) government...
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...
Use the IS-LM framework to carefully explain how such an expansionary fiscal policy, either tax cut...
Use the IS-LM framework to carefully explain how such an expansionary fiscal policy, either tax cut or government spending increase or both, affects the equilibrium output, interest rate and investment.
How is the idea of a liquidity trap related to the interest elasticity of money demand?...
How is the idea of a liquidity trap related to the interest elasticity of money demand? Under what economic circumstances would a liquidity trap likely occur?
Question 1 By relying on the IS LM Model explain what will be the effect of...
Question 1 By relying on the IS LM Model explain what will be the effect of a tax cut policy on the equilibrium level of income. Explain in detail the different steps, how does this policy impact the investment? Question 2 Keynesian economics assume that prices are sticky (they do not change) in the short run. It is an assumption shared by classical economics. Explain briefly what are the characteristics of classical economists and according to them what drives the...
With the aid of an appropriate money demand and money supply graphs, explain how LM curve...
With the aid of an appropriate money demand and money supply graphs, explain how LM curve is derived for an economy.
1. Graphically show how in a liquidity trap, an expansionary monetary policy doesn’t improve output.
1. Graphically show how in a liquidity trap, an expansionary monetary policy doesn’t improve output.
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the...
The crowding out effect is zero if Select one: a. the LM-curve is vertical b. the central bank conducts open market sales following fiscal expansion c. income is stimulated via a tax cut rather than an increase in government spending d. the central bank conducts open market purchases following fiscal expansion e. the LM-curve is horizontal An asset (other than money) is considered to be more liquid if Select one: a. it can be quickly and cheaply transferred into money...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT