Business

711 Words Nov 1st, 2015 3 Pages
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

More about Business

Open Document