Question

1- Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to cut taxes in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate. 3- What are the differences between the real exchange rate and nominal exchange rate? 4- Explain the difference between gross domestic product and gross national product 3- What are the differences between the real exchange rate and nominal exchange rate? The real exchange rate, EP/P*, represents the relative price of domestic goods in terms of foreign goods. The nominal exchange rate, E, is the relative price of domestic currency in terms of foreign currency. 4- Explain the difference between gross domestic product and gross national product GDP represents the market value of all final goods and services produced IN a country during a given period. GNP is the market value of all final goods and services produced by domestically owned factors of production in a given period. 5- Discuss what factors could cause a real depreciation. 6- Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria. 7- Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect a reduction in foreign output (Y*) will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria. 8- Explain what are the determinants of Exports and Imports 9- Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a reduction in foreign output (Y*) will have on the domestic economy. In your graph, clearly label all curves and equilibria. 10- Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a monetary expansion will have on the domestic economy. In your graph, clearly label all curves and equilibria. 11- Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in government spending will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria. 12- Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a monetary contraction will have on the domestic economy. In your graph, clearly label all curves and equilibria. 13- Explain the difference between: (1) the demand for domestic goods; and (2) the domestic demand for goods 14- Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a reduction in government spending will have on the domestic economy. In your graph, clearly label all curves and equilibria. 15- Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a increase in foreign output (Y*) will have on the domestic economy. In your graph, clearly label all curves and equilibria.

Answer 1

question 1) A cut in taxes in present and expected cut in future taxes means that disposable income of individual increases causing the consumption to increase . So aggregate demand increase causing the IS curve to shift right to IS' in diagram . Given the LM curve , new equilibrium occurs when IS' intersects LM in the diagram at point F where output has increased from OY1 to OY2 and interest rate has also increased from OR1 to OR2 .

( answered 1 questions as per the policy )