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a. An economy is initially at the natural level of output. There is an increase in government spending. Use the IS-LM model to illustrate both the short-run and long-run impact of this policy change. Be sure to label: i) the axes; ii) the
b. Explain in words the short-run and long-run impact of the change in government spending on output and interest rates.
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- 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?The US Government is facing major budget deficit deciding between implementing fiscal and monetary policy to boost output back to potential output. In the presence of expectations, using the IS-LM model graph the effects on the US economy from a contractionary fiscal policy? What would happen if this change is perceived as permanent by investors? Graph and explain. What would happen if the government was perceived as wasteful? Graph and explain.In the extended version of the classical model, based on the misperceptions theory. a. Graphically show the effect of an unanticipated increase in money supply using the AS-AD model. Make sure to label the short-run equilibrium point. b. Repeat part (a). This time, assume that the public was anticipating this increase in money supply. c. Is the short-run equilibrium in part (b) point the same as in part (a). Why or why not?
- Suppose the economy begins with output equal to its natural level. Then there is an increase in consumer confidence and households attempt to consume more for a given level of disposable income. a. Using the AS-AD and IS-LM models, show the effects of an increase in consumer confidence on the position of the AD, AS, IS, and LM curves in the short run and in the medium run. Precisely label all axes and curves to receive full credit. Label the short-run equilibrium and medium-run equilibrium with SR and MR, respectively. b. Explain the transition process from the short-run equilibrium to the medium-run equilibrium. In particular, discuss what makes the equilibrium changes over time. c. ] Can private saving increase in the short run when there is an increase in consumer confidence? Discuss about the necessary condition for the higher private saving in the short run.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".Construct an Aggregate Supply and Aggregate Demand model where AS and AD are in equilibrium at potential GDP at a price level of 110 and Real GDP of $13.0 trillion dollars. Be sure to label all parts of the graph. a. Graph the initial effects of a recession that causes AD to decrease and real GDP to fall $0.5 trillion. b. Explain what will happen in the long run if nothing is done. c. If the government wanted to intervene in the economy, explain the Fiscal Policy measures that can be used to bring real GDP back to potential.
- Please note that this is a multi part quesition; thank you so much for your time and effort it means so much to me! Figure 1: Hayek’s (Classical) AD-AS Model (Image normally goes here) Part 1: Why does Hayek’s aggregate supply curve always lead to an equilibrium level of national output equal to the full-employment level of real GDP? Part2: Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Part 3: Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?Analyze the SR and LR impact of a rise in Taxes (T) on the economy. Note that higher Taxes affect disposable income. Assume that the economy starts in General Equilibrium. 1. Now show the impact of the fall in optimism on the IS-LM diagram and the AD-AS diagram BOTH in SR and LR. No discussion. Clearly show & label the SR impact and the LR impact in both diagrams. 2. Now use the "time diagrams", to show the impact of this shock over time on the following 2 variables: real interest rate (r) and real money 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. Based on this information, answer the following questions: a) Using the AD-AS model and IS-LM model illustrate the impact of an expansionary fiscal policy. Label the initial points in both diagrams as A and the new points following the policy change as B.
- 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)In this section, the context is a large negative shock to autonomous consumption in an open economy. You may assume the economy is initially at a medium run equilibrium. (a) Aggregate demand can decline for many reasons. Give a specific example of when you would choose to model the onset of a recession by a fall in autonomous consumption and explain why. (b) Provide two different scenarios in which the macroeconomic policy response to the shock in an op economy includes the use of expansionary fiscal policy, Explain your reasoning, the policy chosen and describe how the economy adjusts to medium-run equilibrium. Refer to real world examples.Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption.b) It will result in an increase in investment but a decrease in government spending.c) It will lead to an increase in investment and private saving.d) It will decrease investment but increase in public saving.
