Consider the IS-LM Investment and savings Liquidity and money preference model to represent the economy in the short run. Consider the IS-LM model to represent the economy in the short run. B. Consider now government intervention with the aim not only to protect people and firms but also to sustain the economy. Discuss the role of fiscal policy to sustain demand. Use a diagram to support your arguments.
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Consider the IS-LM Investment and savings Liquidity and money preference model to represent the economy in the short run. Consider the IS-LM model to represent the economy in the short run.
B. Consider now government intervention with the aim not only to protect people and firms but also to sustain the economy. Discuss the role of fiscal policy to sustain demand . Use a diagram to support your arguments.
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- 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.Assuming that the money demand function depends on income, the interest rate and the price level as presented in class, then if planned investment decreases as the interest rate increases, the size of the government spending multiplier for expansionary fiscal policy will be________ than it was when we ignored the money market. a)exactly the same b)larger c)smallerWhat, if anything, does expansionary fiscal policy do in the i-M space graph, cet. par.? Explain. Indicate the disequilibrium that is created at the initial interest rate and explain what will happen and why. There is a liquidity trap in the i-M space graph. Show what this means in the i-M graph and then explain what type of macro policy will not work.
- 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.Suppose the government undertook a fiscal policy by increasing government expenditure by 20 percent. Clearly demonstrate how this would result in the crowding out phenomena.c. Suppose the instead of fiscal policy, the government, through its monetary authority undertook an expansionary monetary policy by increasing nominal money supply by 20 percent. Clearly demonstrate how this would result in the crowding in phenomena.Our macroeconomic model suggests that after a decline in aggregate demand like that of 2007, the economy will self correct and return to a position where the GDP gap is zero. If this is correct, why should the government ever intervene with fiscal policy? a. It take many years for the GDP gap to close on its own. b. This is part of the government's "mission statement" as given in the Constitution. c. Fiscal policy is profitable for banks. d. People do not trust the theory behind the model.
- Use an open-economy ISLM framework to graph and explain the overall effect of expansionary fiscal policy on y and r in an economy characterized by a relatively interest-sensitive money demand function. Also consider the impact of this policy on the distribution of output among spending sectors.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.4. Analyze the effects of a contractionary fiscal policy on IS-LM model and AD-AS model when the labor market presents rigidities and nominal wages are not dynamic. Explain carefully and use the graphs.
- One of the main arguments against using Fiscal Policy is the crowding out effect. Suppose the government uses government purchases to stimulate the economy. Explain the crowding out effect in detail using a graph for the bond market, the money market, the foreign exchange market, and the AD SRAS LRAS model.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 question: a) 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 prior to the fiscal policy as A and the new point following the expansionary policy as B.Exercise 1 a) Use the equation for the circular flow of the real economy to give an overview of thedemand side components and tie players in the macroeconomy to each of thesecomponents.b) How can you use the equation for the circular flow to discuss the effect of fiscal policyand monetary policy?c) As a follow up from part b), discuss the statement: “During the pandemic, expansionarymonetary policy did not boost the economy as expected”.d) For the following two cases, use the equation for the real interest rate to give anexample for each case using numbers for real interest rate, nominal interest rateand inflation. Explain each number you select.Case 1: A situation where it is a real cost if you borrow money.Case 2: A situation where it is a real gain if you borrow money.e) Let GDP (Gross Domestic Product) as a simplification, only be one good, apples. Find theGDP deflator if nominal GDP = 100 and real GDP = 20 and explain these three numbersusing apples as an example.f) As a follow up…
