C = 100 + 0.5 · (Y – Ť) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 300, T= 200. The LM (money market equilibrium) curve is M Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a“ = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r Question 4 The CB wants to use open market operations to reduce M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices? Question 5 After everyone is vaccinated, suppose that consumers suddenly withdraw all their checking deposits and start preferring cash transactions. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand? Explain.

C = 100 + 0.5 · (Y – Ť) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 300, T= 200. The LM (money market equilibrium) curve is M Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a“ = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r Question 4 The CB wants to use open market operations to reduce M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices? Question 5 After everyone is vaccinated, suppose that consumers suddenly withdraw all their checking deposits and start preferring cash transactions. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Use the IS-LM model to illustrate graphically the final impact of the reduction in government spending on output and interest rates under two possible scenarios: i) The Central Bank holds the money supply constant. ii) The Central Bank holds the level of output constant.
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