Q1.Consider the following policy mix. The government wants to decrease its budget deficit,whereas the central bank increases the money supply.(a) Explain how the IS- curve can be obtained graphically from the equilibrium conditionon the goods market(b) Explain how the LM-curve can be obtained graphically from the equilibrium conditionon the money market.(c) Explain what contractionary fiscal policy means. What effect does contractionaryfiscal policy have on the IS or LM-curve?(d) Explain what expansionary monetary policy means. What effect does expansionarymonetary policy have on the IS or LM-curve?Q2. Consider the following economy:C=1000-50i + 0.6(Y-T)T = 100+ 0.2YI = 200 - 10iG = 1000(M/P) = 600(M/P)D = 0.2Y - 30i(a) Write down the IS equation for the economy(b) Write down the LM equation for the economy(c) Now suppose the government decides to increase G from 1000 to 1200.(d) What is the new equilibrium Y and i?(e) What is the change in equilibrium I as G increases from 500 to 1000? Why does it eitherincrease or decrease?7

Approach to Solving the Questions:1. Understand the IS-LM Framework:Grasp the concept of equilibrium…

Answered: Q1. Consider the following policy mix.…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Mf4. 18. INTERACTION BETWEEN FISCAL POLICY AND MONETARY POLICY (a) Derive the IS curve and the LM curve graphically (from the Keynesian cross and the theory of liquidity preference, respectively) and denote the equilibrium interest rate and level of income. (b) Analyze the effect of an increase in government spending graphically. What is the crowd effect? (c) Under the various responses of monetary policy to the fiscal expansion, when is the stimulating effect is maximized and why?
Which of the following statements regarding government fiscal policy are correct? Assume ceteris paribus. a) The government's debt to GDP ratio will be increasing if there is a primary budget deficit. + b) Higher spending on interest payments increases government debt but does not increase the primary deficit. c) In a recession, a government using fiscal policy to stabilize aggregate demand will design its policy to override the automatic stabilizers. ◆ +
a) Draw an aggregate demand/aggregate supply graph of an economy in a Recessionary situation. b) show clearly the GDP gap on your graph. c) examine the impact of the fiscal policy described above on the relevant components of AD and SRAS( if applicable). Account for the role of the autonomous spending multiplier.
07. What factors make an expansionary "stimulus" fiscal policy effective? One answer a) A government budget deficit associated with fiscal stimulus should should borrow money from those who spend less and save more, to those who spend more and save less. b) A permanent decrease in taxes is more effective in stimulating spending than a temporary one c) An increase in government purchases of goods and services should be temporary and should not permanently displace private spending d) The most expansionary way of financing the budget deficit associated with a fiscal stimulus policy is by the central bank expanding the quantity of money in circulation. e) Infrastructure investment belongs with long-term growth policy, but invariably makes a poor element in stimulus policy because such investment normally take a long time to implement. f) All the above
a) Write the equation representing snapshot of budget and Indicate the status of the budget as having a surplus or deficit, or balanced at Zero and explain why? How is this budget expected to affect the GDP? Explain! (b) Use the lump-sum tax and the MPC to calculate the decrease in consumption due to this lump sum tax (show all your calculations); then use the change in consumption you just obtained to find the consumption after tax (ca-fill in the column 7 below). (c) Use the Ca to find the (after-tax) aggregate expenditures for the 4-sector private-public-open economy (AEa) and fill in the column 8; Now use the column 1 and column 8 to find the new equilibrium GDP and DI in the 4-sector model. (d) Has GDP increased in the 4-sector compared with those in the previous 3-sector equilibrium? If so, by how much? What is the effective multiplier from 3-sector to 4-sector and why? Explain. (e) Has DI changed from 3-sector to 4-sector? Why/why not? How about consumption and savings? Explain…
Only D, E, F
Fiscal Policy: Recessionary vs Expansionary Policy Complete the following exercises. 1. Describe a policy measure the government can use to close a recessionary gap. 2. Illustrate your response to question 1 in a graph. 3. Describe a policy measure the government can use to close an inflationary gap. 4. Please Illustrate Graphically in response to question (question 3: Describe a policy measure the government can use to close an inflationary gap.)
4 HOMEY set of any of yes to $30 -0- -o- My ly Suppose that for every increase in the sterest rate ens peresage the end of westmant spending decies by 565 bon Based on the anes the level of investments to b Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADS) after accounting for the impact of the increase in government purchases on the interest rate and the level of…
Principles List 6: Principle 1. Explain what it means If The Marginal Propensity to Consume = 2/3 And draw a Consumption Curve with The Marginal Propensity to Consume = 2/3 principle 2. Define equilibrium in the Aggregate Expenditures Model or the Keynesian Model and illustrate the Equilibrium graphically Principle 3. Define the expenditures Multiplier and illustrate it graphically Principle 4. Distinguish between Fiscal Policy solution for a recession and Monetary Policy for a recession
How would I do d?
a) What are the three fiscal policy tools and how would each be used to counter a contractionary gap? b) True or False and explain: Fiscal Policy is effective at reducing the duration of an economic contraction. c) True or False and explain: Households always react to tax changes in a predictable manner.
How would I do a and b?

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