Question 3. In this question, we consider optimal policy to Covid in IS-LM framework. Suppose that due to Covid, households expectation about future become pessimistic. Assume that government spending is fixed at G, tax revenue is fixed T, and economy is closed. a) How would you model this change in IS-LM model? What happens to IS curve? What happens to LM curve? Why? b) Draw IS-LM curves before and after the shock. What is the optimal monetary policy to recover the output? Illustrate the impact of this policy on a graph with IS-LM curves. Please draw a new graph.

Question 3. In this question, we consider optimal policy to Covid in IS-LM framework. Suppose that due to Covid, households expectation about future become pessimistic. Assume that government spending is fixed at G, tax revenue is fixed T, and economy is closed. a) How would you model this change in IS-LM model? What happens to IS curve? What happens to LM curve? Why? b) Draw IS-LM curves before and after the shock. What is the optimal monetary policy to recover the output? Illustrate the impact of this policy on a graph with IS-LM curves. Please draw a new graph.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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