In the IS/LM model, if the Keynesian expenditure multiplier is 2.76, the investment sensitivity to interest rates is 10, the income elasticity of money demand is 0.2 and the interest rate elasticity of money demand is 3, then the monetary policy multiplier with respect to income is O 3.2 O-0.12 O 0.12 O 3.2
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- Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T)I = 1000 - 300?G = 1000T = 1200MD = 0.5Y - 200rM = 5000P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer. (e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written…Let the IS equation be: Y = A/(1-b) – [g/(1-b)]i, where (1-b) is the marginal propensity to save, g is the investment sensitivity to interest rates, and A is an aggregate of exogenous variables. Let the LM equation be: Y = M0/k + (l/k)i, where k is the income sensitivity of money demand, l is the interest sensitivity of money demand, and M0 denotes real money balances. If b = 0.7, g = 100, A = 252, k = 0.25, l = 200, and M0 = 176, do the following operations: a. Write the IS-LM equation in matrix form. b. Solve for Y and I by matrix inversion. c. Solve for Y and i by Cramer's Rule. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.With respect to the IS/LM model, which of the following statements is false? Interest rates and output are the endogenous variables The position of the IS curve is given by α (alpha) The IS/LM model is an extension of the income-spending model The LM curve maps interest rates and output such that the money market clears Along the IS curve, planned aggregate spending is equal to income
- Consider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much?b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?Consider a closed economy where the goods and money markets are described by the following relationships: C 500+ 0.8 (Y-T) I= 500 10r M P a) 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). mpute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. e) Suppose that, instead of relying on monetary policy, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy. f) An…Outline the main concepts of the Liquidity Preference Theory proposed by John Maynard Keynes and discuss its applicability to the Caribbean region.
- On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.Consider an IS-LM model where the central bank sets the nominal interest rate. The consumption and investment functions are given by C = 200 + 0.25(Y - T) I = 150 + 0.25Y – 1000i. and suppose that government expenditures and taxes are given by G = 250 and T = 200. respectively. Let real money demand be given by MIP = 2Y – 8000i, and let the initial interest rate be ig = 0.05. Solve for the equilibrium values of output and real money supply. (b) Solve for the equilibrium values of C and I, and verify that consumption, investment and government expenditures indeed add up to output Y. (c) Now suppose that interest rate is cut to ig = 0.03. Solve for the new equilibrium values of Y, M/P, C and I. What are the effects of this change on the economy? Provide brief intuition. (d)" Set the interest rate back to ig = 0.05. Now suppose that govermment spending increases to G = 400. If the central bank keeps the interest rate unchanged, how should monetary supply respond to this expansionary…Which of the following statements is false? The larger the expenditure multiplier, the steeper the IS curve The LM curve is positively sloped because higher interest rates induce higher income levels in order for the money market to remain in equilibrium The adjustment mechanism in the Keynesian income-expenditure model is an unplanned rundown or accumulation of inventories The aggregate expenditure function relates planned spending to income A position that is to the left and below the IS curve indicates that there is excess demand for goods and services
- Assume a closed economy described by an IS-LM model. Explain what is meant by a liquidity trap, how such a condition can arise and what policies can be implemented to get out of it.Suppose that economy of Portugal is characterized by the following C = 200 + 0.5 (Y - T) Represents the consumption function I = 600 – 30 r represents the investment function G = 300 represents the public spendingT = 300 represents the level of taxation (m/p)d = y - 40 r represents the money demand function (m/p)s = 1500 r represents the real money supply d Y represents the global output Find the IS curve the LM curve and deduce the equilibrium level of interest rate equilibrium level of income. The government increases the money supply by 100. How does it affect the equilibrium level of income? Justify your answer. Calculate the new equilibrium... Equilibrium level of incomeConsider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8 (Y-T) I = 500 - 10r M P = 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. 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 whe her the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. 2. 1. What is…