3. Derive tne equations of IS curve, LM Curve, and find equilibrium income and int Trom this IS-LM model using Cramer's rule. What is the response on interest rate and income if tax rate (increases? Ma = my +M, -AY, My=M=M
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- 1) The IS-LM Model a) In the IS/LM model explain what happens to equilibrium output and interest rate if governmentsimultaneously pursues expansionary fiscal policy and the central bank opts for a contractionarymonetary policy. Show with the help of a graph along with a very brief verbal explanation. b) Label the statements below as true or false and give a brief explanation for false statementsonly. i) For a given level of P (price), if M (nominal money) increases by 10%, M/P also increases by10% ii) A monetary expansion leads to a lower output and a higher interest rate. iii) Equilibrium in the financial market implies that an increase in income leads to a decrease ininterest rate making the LM curve downward sloping. c) Assume a model economy with the following parameters:C= 100 + 0.25 YD ; I= 100 + 0.5Y - 3000iG= 125 ; T= 100 ;(M/P)d = 6Y - 24000i ; (M/P)s = 4500Derive the IS and LM relation. 2) The short and medium run a) Suppose that the mark-up of goods prices over marginal…Determine how each of the following monetary or fiscal policy would shift the aggregate demand curve. Illustrate and explain the following effect. a. Assuming the economy is currently producing above the full employment output, the government decided to increase the personal income tax as a form of contractionary fiscal policy. Illustrate and explain the effect of the policy using AD-AS curve. b. With the recession due to COVID-19, the central bank has decided to lower down discount rates and reserve requirements of the commercial bank. Illustrate and explain the effect of the policy using AD-AS curve.The consumption function is given by: C = 200+0.75 (Y-T). The investment function is I = 200-25r. G =100 T=100 1. The money demand function is Md = Y-100r. The Money supply M is 1000 and price is 2. Derive the LM equation.2. Find the equilibrium interest r and the equilibrium level of income Y, investment and consumption3. Suppose that the government purchases (G) raised from 100 to 150. How much does the IS Curve shift? What are the new equilibrium interest r and level of income, y? If there is no crowding out effect, what is the full multiplier effect of the change in G?
- Qus 3 Explain and illustrate how a fiscal expansion can be accomodated by a monetary expansion in IS/LM frameworkAssume certain coutory economy consumption function =200+0.75(Y-T) given government purchase and Tax are 100 and investment function =100-25r real money demand =25y-100r money supply =1000 then find equilibrium income and interest rate when government purpose increase by 80 percent and tax increase by 70 percent draw IS and LM curve and by how much they shift ?10.2 In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment?Explain. a)When the investment accelarator is large or when it is small? 11.1 Explain how each of the following developments would effect the supply of money,the demand for maoney, and the interest rate.Illustrate your answers with diagrams. e)A wave of optimism boosts business investment and exapands aggregate demand.
- Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of an expansionary fiscal policy. Label the initial point prioer to the fiscal policy as A and the new point following the expansionary policy as B.Hi this question is for macroeconomics but on bartleby does not show any option for macroeconomics As a result of COVID-19, the Government of Canada has been actively using a discretionary fiscal stimulus policy. Using the Aggregate Supply – Aggregate Demand model, illustrate the intended impact of this policy on Aggregate Demand. Has the fiscal stimulus policy been effective? Why or why not? When the discretionary fiscal stimulus policy has ended, what actions with respect to the budget, will the government have to consider to address the debt level resulting from the discretionary fiscal stimulus policy?Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. Based on this information, answer the following questions: b) What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy. (***explanation of crowding out where the concept is clearly defined and implications for the macroeconomy are fully discussed) c) If the MPC rises to 0.8 and also the sensitivity of real money demand to changes in the income rises well, use the IS-LM model to illustrate the impact of expansionary fiscal policy. Label the initial point prior to the fiscal policy as A and the new point following the expansionary policy as B. (***Correct fully labeled IS-LM Model shown including adjustment from the diagram in a) and correct position of points A and B.)
- Q.1.4 Which of the following statements about Fiscal Policy is INCORRECT? (2)(a) In order to combat inflation, the South African Reserve Bank must apply acontractionary fiscal policy;(b) A contractionary fiscal policy can result in higher levels of unemployment;(c) Expansionary fiscal policy will increase the budget deficit;(d) The application of fiscal policy will have no effect on aggregate supply in theAD‐AS model.1. What is the difference between what Supply Side economists expect to happen when taxes are cut and what Keynesian and other economists expect to happen when taxes are cut? (Explain in turn which curve Supply Siders expect to shift and which way,, and which curve Keynesians expect to shift, and which way.) 2. A. What are two examples of "automatic stabilizers" that might kick in during a recession to reduce the size of the downturn? B. Which component of Aggregate Demand (C, I, G, or X-M?) do automatic stabilizers affect? 3. What is the difference between a government budget deficit and the national debt?Part C D A housing bubble has burst, causing a negative wealth effect. Use the IS-LM model to answer the following: a) What happens to output and the real interest rate? Draw an IS-LM diagram to illustrate your answer. Begin with the economy at full employment output. Be sure to include the FE line in your diagram. b) What sort of fiscal policy is appropriate to restore full employment output? State specifically what the government should do. (Do not add this to your diagram.) c) What sort of monetary policy is appropriate to restore full employment output? State specifically what the central bank should do. (Do not add this to your diagram.) d) Suppose neither the government nor the central bank take any action. How will the economy return to full employment output? Add this to your diagram.
