Dual Mandate: Suppose the central bank has a dual mandate. This implies the following IS-MP-AS model: IS: Ý = ā – b(R¢ – F) MP: R – 7 = m(Tt – ñ) + dỸt AS : Tt = Tt-1 + ūYt +ō (a) Why does the above model represent a dual mandate? (b) Solve for the AD curve of this economy.
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- Suppose the Government wishes to reduce the budget deficit by reducing public spending while holding taxes constant. Assuming that the monetary authorities hold the money supply constant, explain why the decrease in government spending affects output more in the IS model than in the IS-LM model. note: show diagrams pleaseConsider following IS-LM model: C = 200 + 0.25 · YD I = 150 + 0. 25 · Y – 1, 000 · i G = 250 T = 200 D M = 2 · Y – 8, 000 · i M = 1,600 P e) Solve for the equilibrium values of C and I! f) Solve for the equilibrium values of Y, i, C and I, if the money suppl increases to 1,840! g) Solve for the equilibrium values of Y, i, C and I, if government spending increases to 400 (the money supply is 1,600)!Use the IS-LM model to answer this question. Suppose that the government wants to lower the budget deficit but keep output constant. Discuss what mix of monetary and fiscal policy will achieve this goal. Provide your line of reasoning and justify the answer. Attach an appropriate graph to support your answer.
- Suppose the government cuts income taxes. Show in the IS-LM model the impact of the tax cut un- der two assumptions: (1) The government keeps interest rates constant through an accommodating monetary policy. (2) The money stock remains unchanged. Explain the difference in resultsSuppose the central bank has a dual mandate. This implies the following IS-MP-AS model: IS: Y_t = a - b(R_t - r) MP: R_t - r = m(pi_t - pi) + dY_t AS: pi_t = pi_t - 1 + v Y_t + o (a) Why does the above model represent a dual mandate? (b) Solve for the AD curve of this economy. (c) Compare the slope of the AD curve in this economy to the slope of an AD curve in an economy with a single mandate (i.e. set d = 0.). Does the slope make sense given the central bank's objectives? Explain using a graph.IS-LM model is defined via seven equations given below: C=15+0.8(Y-T) T= -25+0.25Y I=65-R G=94 X=50-10-0.1Y L=5Y-50R M=1500 C: Consumption, Y: Income, T: Tax, I: Investment, R: Interest Rate, G: Government Expenditure, X: Net Exports, L: Money Demand and M: Money Supply. Solve this system for Y and R in the matrix format by reducing it to IS and LM equations. Calculate government and trade deficits. Note that IS-LM structure is based on Y and R.
- Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.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.Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in…
- Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in…Using IS-LM analysis, describe the likely effects of a tightening of both monetary policy and fiscal policy on the level of real output.True/False and Explain When nominal interest rates are zero, the central bank can still lower them by printing money and purchasing bonds from banks. This increases the supply of loanable funds and stimulates lending. A pro-savings policy by the US would likely reduce the US trade deficit. When savings equals investment, reducing savings and increasing consumption is especially effective in stimulating output. In the dynamic AS-AD model, a perfectly inelastic aggregate supply curve means the central bank cannot control the rate of output growth or the inflation rate. There are an infinite number of combinations of real interest rates and inflation rates consistent with a nominal interest rate of zero.