Use the extended IS-LM model graph to show where the US economy is functioning now given that the current u is 7.9% and the full-employment (FE) u (aka un) is 4%. [Hint: if u > u FE then Y< Y FE.] Indicate the gap and provide its name.
Use the extended IS-LM model graph to show where the US economy is functioning now given that the current u is 7.9% and the full-employment (FE) u (aka un) is 4%. [Hint: if u > u FE then Y< Y FE.] Indicate the gap and provide its name.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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- Use the extended IS-LM model graph to show where the US economy is functioning now given that the current u is 7.9% and the full-employment (FE) u (aka un) is 4%. [Hint: if u > u FE then Y< Y FE.] Indicate the gap and provide its name.
- Let’s assume that a “second covid-19 wave” in December 2020 leads to more lockdowns, so that many more businesses struggle to survive and face an increase in their probability of bankruptcy. What is this “shock” and what would it do, cet. par., to your graph of part a.? Explain any shift(s).
- Let’s assume the Federal Reserve fixes the gap in your graph of part b. Provide appropriate name(s) and policy tools and show what will happen in your graph of part b. What role, if any, does the “zero lower bound” play?
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