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- For each of the following scenarios, assume the economy experiences an exogenous decrease in investment demand. For each case, illustrate the IS-LM-FX diagram and state the effect of the shock (increase, decrease, no change, or ambiguous) on the following variables: Y, i, E, C, I, TB. Here, we assume the policy makers’ objective is to keep output fixed at its initial valueSuppose we start with a general equilibrium, and there is a decrease in the effective tax rate on capital. What is the short-term effect of this shock? 1. real interest rate rises, and output rises 2. real interest rate rises, and output drops 3. real interest drops, and output rises 4. real interest rate drops, and output drops 5. None of the aboveevaluate the role of floating rates as automatic stabilisers when exogenous shocks hit the economy.
- Determine the macroeconomic impacts on interest rates and output from a macroeconomic shock using the September 11 terrorist attacks as an example. Background - Assume the economy was in short and long-run equilibrium before the terrorist attacks. Thus, ignore the fact that the stock market dotcom bubble busted a few months before September 11th. Analyze the short-term macroeconomic impact on the economy of this shock and discuss alternative policy responses, identifying the resulting new short-term equilibrium of the economy in the IS-LM diagram. The price level is assumed fixed as we are focusing on the short run impact. Briefly describe the circumstances surrounding the macroeconomic shock. Your analysis should identify which component of the economy (C, I, or Md) was directly affected by the attacks. Create an IS-LM diagram, tracing the macroeconomic impacts of the shock within the IS-LM framework. You can assume that the economy was in long- and short-term equilibrium…The economy of Pakistan has faced both a supply demand shock in the first quarter of 2020. Using the AS/AD model explain how you expect the economy to behave in the short and long run. How does the decision to reduce the policy rate impact the economy. Explain using the ISLM model focusing on impacts on the goods and services market and the financial market.Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Also in year 2, the cost of lumber used to build homes decreases. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point B after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point E after the change d The equilibrium will be at point E before the change in expectations and point A after the change
- Use the IS-LM model to describe the short-run effects of a decrease in government expenditure on the equilbrium output and real interest rate. Assuming the economy is in a long-run equilibrium before the shock, also explain how the price level changes over time, and what happens to the economy in the long run. Use the AS-AD framework for this part of the question. Add diagrams to illustrate the answer - you can use the attachment feature of the answer editor to upload your chart.Complete the following table to compare the results of an unanticipated expansionary policy to those of an anticipated expansionary policy in the short run and long run. Determine whether, in the short run, the level of output increases, decreases, or remains unchanged relative to the potential output level when the expansionary policy is anticipated versus unanticipated. Additionally, determine whether, in the long run, the actual price level is above, below, or the same as initial expectations under both scenarios, and, again, determine whether the level of output increases, decreases, or remains unchanged. Anticipated Expansionary Policy Unanticipated Expansionary Policy Short-Run Change in Output Decrease/Increase* Decrease/Increase/No Change* Long-Run Change in Price Level Same as Initial expectation/Higher then initial expectations/ lower then initial expectations* (same options as box on the left) ** Long-Run Change in Output Decrease/Increase/No change*…Some economists believe that a reduction in the level of economic activity and an increase in unemployment are inevitable.’ Use the extracts and your knowledge of economics to assess the view that when an economy experiences a negative economic shock there will always be a sustained increase in unemployment.
- According to the Keynesian ideas on Aggregate Demand, a macroeconomist would most likely expect business expenditure to increase when ... Group of answer choices a. Interest rates are low and expected returns are low b. Interest rates are high and expected returns are high c. Interest rates are low and expected returns are high d. Interest rates are high and expected returns are lowSuppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples’ investments, such as their retirement accounts and other investments, to increase in value. People feel very good about the future and use their new-found wealth to buy things that they had been hesitant to purchase in the past. Describe, in a short essay inserted below these questions, how the economic situation will change and how the government could best respond to these changes. Include detailed answers to the following questions in your essay: What kind of economic gap will start to occur (inflationary or recessionary)? What kind of fiscal policy might be helpful to stabilize the economy…Refer to the Figure B. Assuming this market is representative of the economy as a whole, a negative demand shock will most likely: 1) cause inflation. 2) increase unemployment. 3) lower prices, but leave output unaffected. 4) reduce both prices and output.
