Question

Use the IS-LM model to answer this question and assume that the
central bank controls the

interest rate. Suppose there is a simultaneous decrease in taxes
and decrease in interest rate.

a. Explain what effect this particular policy mix will have on
output and the money supply.

b. Based on your analysis, do we know with certainty what effect
this policy mix will have on

investment? Explain

Answer #1

6. Consider the IS-LM model. The central bank uses the interest
rate as its policy instrument. Illustrate and explain the impact of
the following shocks on the equilibrium values of real
income/output, money stock, consumption, and investment.
A. The non-bank private sector lowers its currency holdings.
B. Households increase autonomous saving
C. Default risk premium declines

Use the IS-LM model to predict the effect of an increase in the
money supply on output, Y , and the real interest rate, r in the
short-run.
What is the effect of this policy on these variables in the
long-run? How do you know?

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).

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....

Using the IS-LM model and assuming the central bank conducts
monetary policy by manipulating the cash rate, explain the effects
of:: Fiscal policy designed to offset the impact of a decrease in
the marginal propensity to consume (assuming an unchanged monetary
policy);

Indicate whether the following statement is true or false.
According to the IS–LM model, if the government raises taxes but
the Central Bank wants to hold income constant, then the Central
Bank must decrease the money supply.
True
False

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?

In the IS-LM model choose all of the following that could lead
to an increase in output, ceteris paribus.
Group of answer choices
Increase in money demand.
Decrease in money supply.
Increase in money supply.
Decrease in household savings.
Increase in household savings.
Decrease in money demand.
Increase in investment.
Decrease in investment.
Decrease in taxes.
Decrease in government purchases.
Increase in taxes.
Increase in government purchases.

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...

Using IS-LM analysis, illustrate the effect of a decrease in the
money supply on equilibrium interest rate and output. Explain what
you are illustrating in your diagram and why the curve(s) are
moving.

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