4. Why are fiscal policy multipliers smaller in magnitude in the variable price-fixed wage version of the Keynesian model than in the fixed-price IS- LM model? Why are these multipliers still smaller when we allow the money wage as well as the price level to be variable? 5. Return to the case considered in question 2, where investment is completely interest inelastic and the IS schedule is vertical. Analyze the effects of an increase in government spending in this case within the variable price- fixed wage version of the Keynesian model. Compare the effects with those in the fixed price version of the model. 6. Analyze the effects of a decline in the government expenditure within the Keynesian model where both the price level and money wage are assumed to be variable. Include in your answer the effects on the level of real income, the price level, and the money wage.
4. Why are fiscal policy multipliers smaller in magnitude in the variable price-fixed wage version of the Keynesian model than in the fixed-price IS- LM model? Why are these multipliers still smaller when we allow the money wage as well as the price level to be variable? 5. Return to the case considered in question 2, where investment is completely interest inelastic and the IS schedule is vertical. Analyze the effects of an increase in government spending in this case within the variable price- fixed wage version of the Keynesian model. Compare the effects with those in the fixed price version of the model. 6. Analyze the effects of a decline in the government expenditure within the Keynesian model where both the price level and money wage are assumed to be variable. Include in your answer the effects on the level of real income, the price level, and the money wage.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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