a) In the context of the IS-LM model, first draw a graph with the IS and LM curves when the economy is in a liquidity trap and output is well below its full-employment level. b) Then, draw the corresponding AD-AS graph and explain why the AD curve has a vertical portion in this case. c) Finally, use your graphs to describe how each of the following developments affects the two curves in both graphs. Government spending increases. The central bank implements conventional expansionary monetary policy Expected inflation rises. In which of these cases, if any, does equilibrium output move closer to its full- employment level?

a) In the context of the IS-LM model, first draw a graph with the IS and LM curves when the economy is in a liquidity trap and output is well below its full-employment level. b) Then, draw the corresponding AD-AS graph and explain why the AD curve has a vertical portion in this case. c) Finally, use your graphs to describe how each of the following developments affects the two curves in both graphs. Government spending increases. The central bank implements conventional expansionary monetary policy Expected inflation rises. In which of these cases, if any, does equilibrium output move closer to its full- employment level?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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