Question

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.

Answer #1

Decrease in money supply shifts the LM curve leftward to LM'. This results in increase in interest rate to i'. Increase in interest rate leads to decrease in investment spending that shifts the AD leftward to AD'. e' is the new short run equilibrium where output is lower and price level is lower too.

In long run AS curve shifts rightward to AS' because wages decrease with decrease in output below full employment. Long run equilibrium reaches at e'' where price level decreases even more and output increases back to initial level Y*.

lower price level increases the real money balances which shifts the LM' back to LM. Interest rate and output are back to original level.

Based on the Aggregate Supply and Aggregate Demand model, and
the IS-LM model, graphically illustrate and explain what effect an
increase in the money supply will have on the economy. In your
graphs, clearly illustrate the short-run and medium-run
equilibria.
Draw both the IS-LM and the AD-AS models.

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...

For each of the following situations, use the IS-LM-FX model to
illustrate the effects of the shock. For each case, state the
effect of the shock on the following variables (increase, decrease,
no change, or ambiguous): Y, i, E, C, I,TB. assuming the government
responds to maintain a fixed ex-change rate.
A. Foreign income decreases.
B. Investors expect a depreciation of the home currency.
C. Private consumption increases exogenously..
D. The money demand increases.

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....

I only need part B, part A is for
reference.
A) Assume the economy is at full employment. Use the IS-LM/
AD-AS model to show the short-run and long-run impacts of a
positive demand shock such as an increase in business confidence
and investment spending on: the real interest rate (r), real GDP
(Y), unemployment (U), consumption spending (C), the nominal money
supply (M), the price level (P) and the real value of the money
supply(M/P). You must present properly...

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.

Question Using the IS-LM model and assuming the central bank
conducts monetary policy by manipulating the cash
rate.TheExpansionary monetary policy designed to offset the impact
of an exogenous decrease in export demand (assuming an unchanged
fiscal policy).

Describe and explain the short-run and long-run effects of an
exogenous decrease in money demand on a closed economy.
1. What is the effect of an exogenous decrease in money demand
in the Aggregate Demand/Aggregate Supply (AD/AS) diagram?
2. Consumption
3. Real GDP
4. Price level
5. Unemployment
6. Interest rate
7. Investment

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

Using the IS-LM model and assuming the central bank conducts
monetary policy by manipulating the cash rate, explain the effects
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the marginal propensity to consume (assuming an unchanged monetary
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