5) a) Suppose there is an increase in consumer optimism about the future (often called an increase in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS- LM diagram. What is the effect on output and the interest rate? b) Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the increase in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the increase in confidence and the Federal Reserve policy? How is consumption affected?

5) a) Suppose there is an increase in consumer optimism about the future (often called an increase in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS- LM diagram. What is the effect on output and the interest rate? b) Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the increase in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the increase in confidence and the Federal Reserve policy? How is consumption affected?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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