2. Assume that there is a negative monetary shock causes the decreasing in money supply. a) Please use IS-LM analysis and explain the effect. b) Based on case 2(a), please use IS-LM analysis to show how fiscal policy can recover the economy back to initial level of income.
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- What is a potential problem with a temporary tax increase designed to increase aggregate demand it people know that it is temporary?Determine how each of the following monetary or fiscal policy would shift the aggregate demand curve. Illustrate and explain the following effect. a. Assuming the economy is currently producing above the full employment output, the government decided to increase the personal income tax as a form of contractionary fiscal policy. Illustrate and explain the effect of the policy using AD-AS curve. b. With the recession due to COVID-19, the central bank has decided to lower down discount rates and reserve requirements of the commercial bank. Illustrate and explain the effect of the policy using AD-AS curve.8. Refer to the diagrams. The multiplier associated with fiscal policy that increases aggregate demand from AD1 to AD2 is less in graph b than in a because: * AS AS AD, AD, AD, AD2 X YZ Real GDP 0. X YZ Real GDP (a) (b) Graph a represents a closed economy while b depicts an open economy. Inflation occurs in b and not in a The economy is in the vertical range of aggregate supply in a and not inb. Graph a represents an open economy while b depicts a closed economy. Price level Price level
- Consider the IS-LM Investment and savings Liquidity and money preference model to represent the economy in the short run. Consider the IS-LM model to represent the economy in the short run. B. Consider now government intervention with the aim not only to protect people and firms but also to sustain the economy. Discuss the role of fiscal policy to sustain demand. Use a diagram to support your arguments.07. What factors make an expansionary "stimulus" fiscal policy effective? One answer a) A government budget deficit associated with fiscal stimulus should should borrow money from those who spend less and save more, to those who spend more and save less. b) A permanent decrease in taxes is more effective in stimulating spending than a temporary one c) An increase in government purchases of goods and services should be temporary and should not permanently displace private spending d) The most expansionary way of financing the budget deficit associated with a fiscal stimulus policy is by the central bank expanding the quantity of money in circulation. e) Infrastructure investment belongs with long-term growth policy, but invariably makes a poor element in stimulus policy because such investment normally take a long time to implement. f) All the above2.When an economy has an aggregate expenditure of $150 billion and the real GDP of $140 billion, then households bought fewer new homes than they anticipated. Select one:True or False 3. Even though both fiscal and monetary policies experience time lags, there are long time lags associated with the legislative process in implementing a fiscal policy which makes it more difficult to use than monetary policy. Select one:True or False 4.In an open economy, like Australia, fiscal policies are more effective than monetary policies when reducing the business cycle fluctuations. Select one: True or False 5.Technological change will shift up the per-worker production function and enable countries to have sustained economic growth. Select one:True or False Ans all.. otherwise don't ans
- 1) Suppose that the government spending multiplier is 1.7, and that the tax multiplier is -1.2. An equal-sized increase in government spending and taxes would be______O. a) expansionary fiscal policyO.b)expansionary monetary policyO.c) contractionary fiscal policyO.d) contractionary monetary policy3. Explain why fiscal policy actions typically work with a lag3. A policy tool that can be used to fight inflation (brought about by excessive aggregate expenditure) is contractionary fiscal policy. * True False
- Exercise 4 Use a combination of text and drawing of figures when answering the following questions: a) Discuss the effect of an expansionary fiscal policy using the IS TR model. Why doces the interest rate change and what does it mean for the Keynesian multiplier? b) How will the answer from the previous sub-question change if: i. the inflation targeting of the Central Bank became more flexible? ii. the country opens up like after a pandemic leading to more imports? c) Explain the difference between the effect of an expansionary fiscal policy using an IS- TR-IFM model comparing Norway and Denmark as examples of countries with different exchange rate regimes. d) Assume a model where actual inflation depends on 1. Underlying inflation, 2. Output gap and 3. Supply chock. Explain in a diagram with an aggregate supply curve (AS) and using numbers for each of these three factors, the outcome in the short run and in the long run, if a negative supply shock like a war occurs.13. Suppose that two countries differ on in the size of their MPC, where the MPC is high in country A and low in country B. Draw IS/LM and AD/AS curves for each country. In which country will monetary policy be most effective at changing income? Fiscal policy?-SRAS PL, PL AD2 AD Y,Y2 REAL GDP The Aggregate Demand Model shows an increase in Aggregate Demand or GDP, Which type of Fiscal Policy was used to cause this change and why? Expansionary Policy to raise GDP and lower the unemployment rate Expansionary Policy to raise GDP and lower Inflation Contractionary Policy to decrease GDP and lower the unemployment rate Contractionary Policy to increase GDP and Increase Inflation PRICE LEVEL