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Name: __________________________ Date: _____________ 1.|Explain the following concepts:IS shocks, LM shocks| 2.|Use the IS/LM-AD/AS model to illustrate graphically how expansionary fiscal and monetary policy can help stabilize the output when economy is in a recession. | 3.|Use the IS-LM model to derive the AD curve and to show how expansionary fiscal and monetary policy can shift the AD curve. | 4.|A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.| 5.|Use the IS/LM-AD/AS model to graphically analyze short-run & long-run effects of a negative IS Shock.| 6.|Assume that an economy is characterized by the following equations:C =…show more content…
By how much will Y increase in short-run equilibrium? What is the multiplier for money supply (the change in Y divided by the change in Ms)?|| 8. Problem 2 on page 336. 9. Problem 3 on page 336. Answer Key 1.|See notes.| 2.|See notes.| 3.|See notes| 4.|In the Keynesian-cross model, both the price level and interest rate are held constant. A decrease in government spending reduces output by 1/(1 – MPC) times the change in government spending. In the IS-LM model, the reduction in output caused by the decrease in government spending is partially offset by an increase in investment (crowding in). In the IS-LM model, the decrease in government spending reduces income as in the Keynesian-cross model, but the reduction in income also reduces the demand for money, which in turn reduces the interest rate for a given money supply. The lower interest rate stimulates the off setting investment spending.| 5.|See notes.| 6.|a.|Y = 2,700 + 3G – 2T – 50r.|b.|r = 0.01Y – 0.02(M/P).|c.|For P = 1.0, Y = 2,800 and r = 4; C = 1,566.67 and I = 733.33. For P = 2.0, Y = 2,400 and r = 12; C = 1,300 and I = 600.|d.|Y = 1,800 + 2G – (4/3)T + (2/3)M/P.|| 7.|a.|Y = 5,000 – 100r.|b.|Y = 3,000 + 100r.|c.|In the short-run equilibrium, Y = 4,000, r = 10, Y – T = 3,000, C = 2,400, I = 600, private saving is 600, public saving

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