1. (a) Derive and carefully explain the IS-LM model. (b) In the context of the IS-LM model, analyse the effects of (i) a rise in taxation; and (ii) contractionary monetary policy.
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- multiple part question Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results. B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium? C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy? D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?Fiscal and Monetary Stimulus A. Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results. B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium? C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy? D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?1. If the domestic currency depreciates, a) using a graph of aggregate demand and supply EXPLAIN how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. b)using a graph of aggregate demandand supply EXPLAIN how lags in this policy process (mentionedin (a)) can result in undesirable fluctuations in output and inflation.
- Using the IS-LM model, analyze the effectiveness of expansionary monetary policy and expansion fiscal policy, why and which policy is more effective under the following conditions: 1) Investment flexibility. high interest rate 2) Demand for holding money responds to changes in interest rates, draws a graph and explains1. If the domestic currency depreciates,a) using a graph of aggregate demand and supply EXPLAIN how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. b) using a graph of aggregate demand and supply EXPLAIN how lags in this policy process(mentionedin (a)) can result in undesirable fluctuations in output and inflation.1. If the domestic currency depreciates,a) using a graph of aggregate demand and supply EXPLAIN in detail how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. b) using a graph of aggregate demand and supply EXPLAIN in detail how lags in this policy process (mentioned in (a)) can result in undesirable fluctuations in output and inflation.
- b. Using the IS-LM framework, analyze the effects of an increase in consumer confidence on the economy (that is equilibrium output, interest rate, money supply, consumption and investment) under the following 2 scenarios: i. The central bank intends to remain money supply. ii. The central bank intends to remain the interest rate.Suppose the central bank has a dual mandate. This implies the following IS-MP-AS model: IS: Y_t = a - b(R_t - r) MP: R_t - r = m(pi_t - pi) + dY_t AS: pi_t = pi_t - 1 + v Y_t + o (a) Why does the above model represent a dual mandate? (b) Solve for the AD curve of this economy. (c) Compare the slope of the AD curve in this economy to the slope of an AD curve in an economy with a single mandate (i.e. set d = 0.). Does the slope make sense given the central bank's objectives? Explain using a graph.Q: How do you think the government and the central bank should respond in order to prevent domestic inflation from rising and offset the adverse impact of the rising US interest rate on the domestic economy. Describe fiscal policy and monetary policy separately?
- II. Short Answer A. Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results.Consider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) 1 = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. Department of Economics a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.1. Which of the following is concerned with changing the aggregate demand of thenation?A) External balanceB) Internal balanceC) Expenditure-changing policiesD) Expenditure-switching policiesAnswer: 2. Which of the following is an example of an expansionary monetary policy?A) Increase in TaxesB) Increase in the nation's money supplyC)Increased government expendituresD) Reduction in taxesAnswer: