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- 1. Explain and show graphically how monetary and fiscal policies can be used in the IS-LM framework. Within a closed economy IS-LM model, analyse the effects on income, the interest rate, consumption, and investment of the following: a) A fall in the government budget deficit. Explain how your answer is affected by whether the reduced deficit comes about through a fall in government purchases or a rise in tax revenue. b) A fall in the money supply. 2. 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. Please note: To help explain your answers and analysis, you should always attempt to use diagrams, mathematical demonstration where applicable and convey the economic intuitions behind the results. Do not forget to label your graphs.(iii)Explain what is meant by the current account multiplier in relation to a fiscal expansion, giving the appropriate equation.Question no1 Suppose in a closed economy, the government reduces her household incometax. Using relevant Classical Theories, explain its long-run effects on savings,real interest rates,s and investments. Question no 2 Suppose Country A is a small open economy with a trade deficit. With a risingconcern of plausible supply chain issues, business firms in Country A tend toincrease their level of inventory. Using relevant Classical Theories, explain how this would affect her netcapital outflow, real exchange rate and trade deficit in the long run.
- ONLY Question 3 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. 3. Assume now that the government cuts taxes and runs a budget deficit while the central bank pursues a tight monetary policy. Investigate what effect should this policy mix have? Analyze what (and why) will happen to investment?1. Consider an economy where the potential output is equal to the equilibrium output (i.e., 7 =Y) and the country is running a budget deficit (i.e., G>T). Suppose that the households in this economy become very thrifty. a. Using the IS-LM model, illustrate (draw a graph) and explain what happens to r and Y due to increasing thriftiness. b. If the government wants to stabilize output Y at its potential Y and balance the budget at the same time, illustrate (Draw a graph ) and explain what combination of monetary and fiscal policies should be implemented.1a)If national income Y = 10,400, disposable income is Yd = 8,800 (assuming transfer payments are zero), consumption is C = 7,700, net exports is NX = 220, and the budget deficit is BD = 150, what is the level of private domestic investment, I ? 1,170 9,230 1,750 1,600 730 1b) The government's structural budget deficit is also called the cyclically-adjusted budget deficit general government budget deficit estimated budget deficit actual budget deficit cyclical budget deficit
- Macroeconomic: 1. With a fixed exchange rate and high capital mobility, is it appropriate to use the fiscal lever to boost economic activity in order to achieve full employment? (explain your answer, you could use the ISLM BP model)Identify and explain the lags which must be taken into account to ensure optimality in interest rate decision making for an economy. State algebraically and explain each of the components of the 3-equation model for macroeconomic policy. State and explain 4 limits to fiscal policy in a developing country economy If low and stable inflation is beneficial, why does the Central Bank target a positive rate?Fiscal and Monetary Stimulus A. Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results. B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium? C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy? D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?
- The context in this is a large negative shock to autonomous consumption in an open economy. You may assume the economy is initially at a medium run equilibrium. Provide two different scenarios in which the macroeconomic policy response to the shock in an open economy includes the use of expansionary fiscal policy. Describe how the economy adjusts to medium-run equilibrium.In the New Keynesian sticky price open economy model with a flexible exchange rate: a. Explain why fiscal policy is an ineffective stabilization tool. b. Suppose that there is a reduction in current total factor productivity. What should the central bank do in response?Both expansionary monetary policy and expansionary fiscal policy increase income in the IS-LM nodel”------ justify the statement. In which case role of private investor is bigger?