Question

1)Suppose that there is a monetary contraction. What are the effects of this monetary contraction on...

1)Suppose that there is a monetary contraction. What are the effects of this monetary contraction on output and interest rate? (Hint: How does it shifts the IS and the LM curves?)

2)Derive the AS relation and draw the AS curve. Explain the properties of AS relation

3)Derive the AD relation using IS-LM graphs   

4)Please explain the effects of the monetary contraction in the short and medium run.   

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Ans 1.) When there is monetary contraction, the money supply in the economy decreases and the LM curve shifts towards the left as can be seen in the diagram below.

This leads to the increase in the interest rate and thus the investment spending decreases due to the high interest rates.This further leads to the decline in the overall output in the economy.

IS curve is not affected with the monetary contraction as it relates to the government spending.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
2. Aggregate demand a. Write down the AD relation. b. Use the IS-LM model to derive...
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 in a closed economy the fiscal policy is contractionary and monetary policy is expansionary,...
Suppose that in a closed economy the fiscal policy is contractionary and monetary policy is expansionary, and the central bank is setting the interest rates (LM is horizontal). Graphically analyze this policy mix by using IS-LM diagram. What will be the impact on real income and on interest rate in the short run? What will be the impact of this policy mix on the economy in the medium run? Show by using an AD-AS-LRAS diagram.
Show the effects in the medium run of an increase in consumer confidence on an open...
Show the effects in the medium run of an increase in consumer confidence on an open economy that is on a flexible exchange rate. (Hint: An increase in consumer confidence will increase autonomous consumption spending). Assume that before the changes, the economy was at the natural level of output. To answer this question, drwa the following two diagrams: 1. The AS-AD curves 2. The IS-LM curves Provide a brief explanation for the changes.
Consider a closed-economy IS-LM model. Assume initially the economy is at medium run equilibrium. Discuss with...
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.
Suppose desired consumption and desired investment are ?? = 300 + 0.75(? − ?) − 300?...
Suppose desired consumption and desired investment are ?? = 300 + 0.75(? − ?) − 300? T = 100 + 0.2Y ?? = 200 − 200? G is the level of government purchases and G=600 Money demand is ?? ? = 0.5? − 500(? + ??) where the expected rate of inflation, ??, is 0.05. The nominal supply of money M = 133,200. Suppose the full employment output is 2500 and the price level in the short run is 120....
1. Suppose you have the following AD and AS curves: Y = 800 − 40π (AD...
1. Suppose you have the following AD and AS curves: Y = 800 − 40π (AD equation) Y = −50 + 60π (Short Run AS equation) Y = 400 billion (Long Run output) (a) Calculate the real GDP and inflation in equilibrium in the short run. Calculate the current output gap. (b) Is the economy in the short run facing a recession or an expansion? Explain. (c) Was the recession or expansion caused by demand or a supply shock? Explain....
Consider the closed-economy model. (a) Suppose the economy is initially in long-run equilibrium with Y =...
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...
1. Consumers’ using cash in transactions more frequently in response to an increase in identity theft...
1. Consumers’ using cash in transactions more frequently in response to an increase in identity theft For each shock, Use the Keynesian Cross and Theory of Liquidity preference to explain the shifts in IS and LM curve Use the IS-LM diagram to determine the effects on Y and r. Figure out what happens to C, I, and the unemployment rate. Your explanations must include graphs with appropriate labels for axes and curves.
1). Suppose in Pakistan the macroeconomic variables i* (foreign interest rate), P (domestic aggregate price level),...
1). Suppose in Pakistan the macroeconomic variables i* (foreign interest rate), P (domestic aggregate price level), P* (foreign aggregate price level), Y* (foreign income level), straight pie (domestic expected inflation), T (domestic net taxes), and G (domestic government spending) are exogenously given, the interest parity condition holds, and the expectations of the future economic trends remain unchanged. In this situation, if the foreign aggregate price level, P*, declines, the IS curve a. would not shift. b. would shift to the...
1- Suppose fiscal policy makers pass a budget that cuts taxes in the current period and...
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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT