a. Suppose that, ceteris paribus, the government raises taxes.Diagram the effects of such a change in the IS-LM model. Whathappens to “the” interest rate?b. Now show both the short-run and long-run effects of this changein the IS-LM model in the AS-AD model. What happens to the pricelevel and output in the short and long runs?
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a. Suppose that, ceteris paribus, the government raises taxes.
Diagram the effects of such a change in the IS-LM model. What
happens to “the” interest rate?
b. Now show both the short-run and long-run effects of this change
in the IS-LM model in the AS-AD model. What happens to the price
level and output in the short and long runs?
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- This question involves the use of the IS-LM and AS-AD models. A. Suppose that, ceteris paribus, the government raises taxes. Diagram the effects of such a change in the IS-LM model. What happens to “the” interest rate? B. Now show both the short-run and long-run effects of this change in the IS-LM model in the AS-AD model. What happens to the price level and output in the short and long runs?Urgentttt!!! Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the price level also increases increase by 10 percent. Part 1What will be the change in LM curve? What will be the change in equilibrium interest rate and output? Explain properly using a graph?Part 2What will be the change in the AD curve? (Hint: first derive the AD curve from IS-LM model and then consider whether AD will shift to the left or right given the change in LM curve) Given that the SRAS curve is horizontal, what will be the impact of change in AD on price level?
- The Short-Run Aggregate Supply Curve (AS) is given by: y=20pAnd the Short-Run Aggregate Demand Curve (AD) is given by: y=25,000−20p Suppose instead that the Central Bank wanted to take action to keep the price-level completely stable. This would entail keeping it constant at its current rate. Suppose also that the Central Bank targets the interest rate directly. Suppose also that: • The Marginal Propensity to Spend is 0.75. • Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption of 250 and a decrease in Autonomous Investment of 250. How much would the Central Bank need to change the current interest rate in order to keep the price level from changing through the medium-term as this output gap closes in the economy?Explain if, and why, you agree, or do not agree, with the following statement [when answering, assume that, in each time period, the economy is described by a static IS-LM model, with consumption and investment depending on contemporaneous variables only]:"In a closed economy wherke the central bank chooses the money supply, the prices of stocks at time t, €Qt, will unambiguously rise if, from time t onwards, government purchases of goods and services, G, go up".Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…
- Consider a closed Keynesian economy and assume the economy is initially in general equilibrium. a) If the central bank sells government bonds in the market how would the real interest rate be affected in the short run? Explain and demonstrate using the asset market equilibrium graph. b)Explain how market with respond in long and short run using IS-LM-FE model and the AD Curve to part a)i neeed it in word form.. not handwrittten Explain, with the aid of three separate IS-LM-FE diagrams, how a decrease in government purchases will affect real output, real interest rate and the general price level in three steps:(i) before the general price level adjusts;(ii) when the general price level is adjusting;(iii) after the price adjustment process is completed.Is the general price level increasing or decreasing during the price adjustment process? Explain the intuition of your answer with reference to the AD-AS framework.Suppose the economy is initially in its long-run equilibrium. Due to the biased (overestimated) expectation of return, the entrepreneurs overwhelmingly become much more aggressive in investment holding other things equal. a. Use the IS-LM model and AD-AS model to graphically illustrate the impact of the biased expectation in the short run and in the long run. What are the changes in the equilibrium real interest rate, output, and prices? b. If the central bank wants to offset the impact of the biased expectation, what is the appropriate measure? Draw a graph as in part a. for illustration. What are the changes in the equilibrium real interest rate, output, and prices in this case?
- Assume the economy is at YFE. In the full SR model, IS-LM, show what will happen if firm confidence falls, cet. par. What will happen to the components of the goods market? Use directional arrows to show and explain all these changes. Who should do what if FE is the goal of policy?Q. 2 The outbreak of COVID-19 has had a significant impact on the economy. Let’s assume a COVID shock that leads to lockdown, and we start from the medium equilibrium output level, Yn. Please explain the impacts of the pandemic and lockdown on the economy using the ASAD framework. a) Show the impacts of the pandemic and lockdown on the economy in the short run by drawing the diagram of AS-AD modelAssume the supply of loans decreases by 25%, even though the economy isinitially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short-run and in the long-run, onthe following: a) Aggregate outputb) Aggregate price levelc) Interest rate Answer all question step by step.Answer Must be correct.
