Question

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.

Answer #1

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

Rise in government spending will raise aggregate demand in an economy which will shift AD curve to its right from AD to AD1 which will increase price level from P to P1 and output level from Y to Y1.

Rise in aggregate demand will shift IS curve to its right from IS to IS1 which will raise rate of interest from "i" to "i1" and output level from "Y" to "Y1".

A real Keynesian model of a mixed economy with a marginal
propensity to consume equal to .9 produces an equilibrium level of
$2400 billion that is $600 billion below a full employment level of
output.
A) What change in government spending would bring about full
employment? Be sure to calculate the government spending
multiplier.
B) The resulting increase in real output have driven up real
interests rates from 3% to 4% and those higher real interest rates
reduced investment by...

1. A real Keynesian model of a mixed economy with a
marginal propensity to consume equal to .9 produces an equilibrium
level of $2400 billion that is $600 billion below a full employment
level of output.
A) What change in government spending would bring
about full employment? Be sure to calculate the government spending
multiplier.
B) The resulting increase in real output have driven
up real interests rates from 3% to 4% and those higher real
interest rates reduced investment...

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)...

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...

Use the IS-LM-FE model to determine the effects of each of the
following on the general equilibrium values of the real wage,
employment, output, the real interest rate, consumption,
investment, and the price level.
d. The introduction of automated teller machines reduces the
demand for money.
(answer says that eventually, price level increases due to an
increase in the usage of ATMs thus, shifting LM curve to the left
and up )
My question is this, what is the relationship...

Consider the following numerical example of the IS-LM model:
C = 100 + 0.3YD
I = 150 + 0.2Y - 1000i
T = 100
G = 200
i = 0.01
a) What is the equilibrium level out output (Y)?
b) suppose the government increase spending to G=300. What is
the new equilibrium level out output?
c) G = 200. What is the equilibrium supply of money id the
demand for money is given by (M/P)d = 2Y - 4000i?

1- In Keynes’s underemployment model with fixed money wages, if
there is an exogenous fall in investment, the economy will settle
at a lower price level leading to
a- a shift in the LM curve to the right and real wage to
rise.
b- a shift in the LM curve to the left and real wage to
fall.
c- a shift in the LM curve to the left and real wage to
rise.
d- a shift in the LM curve...

Use
the IS-LM model to determine the effects of each of the following
on the general equilibrium values of the real wage, employment,
output, the real interest rate, consumption, investment, and the
price level.
Draw
the diagrams for each.
(a)?Tougher immigration laws reduce the working-age
population.
(b)?There's increased volatility in the prices of stocks and
bonds.
(c)?The government tries to achieve tax equity by an increase in
the corporate tax rate.

Explain why within the IS-LM curve model an increase in
government spending causes the interest rate to rise. What factors
determine the magnitude of the increase in the interest rate for a
given increase in government spending?

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.

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