Consider an economy that begins in a situation in which output equals potential output. Consider the modified representation of the IS-LM diagram in which the y-axis is the nominal interest rate versus the real interest rate, where we take into account the presence of the zero lower bound (Graph A). Suppose that a collapse in house prices impacts the economy. 1. Use either the 4-point curved line drawing tool or the line drawing tool to show the effect on either the IS or the LM curve. Hint: Only one curve will shift. 2. Use the point drawing tool to indicate the new equilibrium output and nominal interest rate.

Consider an economy that begins in a situation in which output equals potential output. Consider the modified representation of the IS-LM diagram in which the y-axis is the nominal interest rate versus the real interest rate, where we take into account the presence of the zero lower bound (Graph A). Suppose that a collapse in house prices impacts the economy. 1. Use either the 4-point curved line drawing tool or the line drawing tool to show the effect on either the IS or the LM curve. Hint: Only one curve will shift. 2. Use the point drawing tool to indicate the new equilibrium output and nominal interest rate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the price level in the economy is fixed at P and the exogenous money supply is given by M, Suppose the LM curve for these values of exogenous variables is drawn as in the figure below where Y is aggregate output and r is interest rate. Consider two points A and B in the diagram Assuming all exogenous variables remain unchanged, pick the correct relation between the nominal money demand Md at point A and point B. Scroll down to view the full image. C A MAYA,TA) > Md(YB, TB) B Md(YA,TA)=Md(YB, TB) M(YA,TA)
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Suppose that national income has fallen from its natural level (Y.) to a lower level at which there is cyclical unemployment. This may have been due to a decline in exports. that has shifted the IS curve to the left. What might cause the LM curve to automatically move to the right and so move the economy back towards Y.? 1. A rise in the general level of prices in the economy. 2. A reduction in taxes. 3. A rise in government spending. 4. A fall in the general level of prices in the economy.
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a) consider the following IS–LM model: C = c1(Y - T) I = b1Y - b2i M/P = d1Y - d2i Solve for equilibrium output. Assume c1 + b1 < 1. b) Solve for the equilibrium interest rate. (Hint: Use the LM relation.) c) Solve for investment.
4) a Suppose there is a decrease in consumer optimism about the future (often called a decrease in consumer confidence). Specifically assume that consumer confidence (co) falls. 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 decrease in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the decrease in confidence and the Federal Reserve policy? How is consumption affected?
1- Consider the following IS-LM model: I= 150 + 25Y - 1000i, (M/P 2Y 8000i, G=250, T= 200 C=200 + 25YD. NX 0, M/P = 1600. a) Derive the IS relation b) Derive the LM relation. c) Solve for equilibrium real output (Y*). d) Solve for the equilibrium interest rate (i*) e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. ) Now suppose that the money supply increases to M/P =1,840. Solve for Y, i c, and T, and describe in words the effects of an expansionary monetary policy. g) Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, 1. C. h) The expansionary fiscal policy in part (g) have resulted in large budget deficit (T= G = 200 – 400 = -200). Suggest a policy mix to decrease fiscal deficit to achieve a balanced budget (T = G = 0). b(Ctrl) - 立

1. [Matrix Inversion in IS-LM Model] Given the IS equation 0.4Y +150r – 847.75 = 0, and the LM equation 0.1Y – 250r – 158.75 = 0, find the equilibrium level of national income Y and the interest rate r by using the technique of matrix inversion.