Suppose that the economy can be described by a closed-economy IS-LM framework and that is in a recession. Assume that the IS curve is relatively steep while the LM curve is relatively flat. If you were to advise the policymakers on which action to take, what would be your advice? Show graphically.

Suppose that the economy can be described by a closed-economy IS-LM framework and that is in a recession. Assume that the IS curve is relatively steep while the LM curve is relatively flat. If you were to advise the policymakers on which action to take, what would be your advice? Show graphically.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 52CTQ: If foreign wealth-holders decide that the United States is the safest place to invest their savings,...

See similar textbooks

Related questions

Q: Consider the graphical representation of the Keynesian cross for a hypothetical country, where the…

A: When autonomous increase in AE od $20 happens, the graph will look like:

Q: Using appropriate real-life macroeconomic example(s), compare and contrast Keynes' Law and Say's Law…

Q: What do the IS curve and the LM curve represent? What is the reason for their respective shape and…

A: The IS-LM model is a method for making sense of and distils the financial thoughts set forth by John…

Q: The government is increasing government purchases to finish the construction of a mega project. What…

A: The economics as a study is based upon the idea that the resources which are present with the…

Q: Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the…

A: The IS-LM model, which means "speculation reserve funds" (IS) and "liquidity inclination cash…

Q: Can you please help me answering the following question (using graphs too): "Using the IS-LM…

A: IS-LM model: The IS-LM model consolidates the market of the product, which decides the harmony level…

Q: inventory

A: Inventory refers to all the goods and even finished commodities that are held by a firm in stock for…

Q: Westeros has recently discovered a new technology that would potentially increase profit for most…

A: (Since you have a posted a question with multiple sub-parts, we will solve the first three sub-part…

Q: Consider the economy of Panda Republic which is characterized by the following IS-LM model. S…

A: A) The fall in consumer confidence would decrease aggregate consumption. As per Graph the IS curve…

Q: In the IS-LM model, what is the effect of an increase in government purchases? Draw an IS-LM diagram…

A: LM curve shows the positive relationship between interest rate and output. It means as the interest…

Q: What does each point on the IS curve represent? What does each point on LM curve represent? What…

A: The IS-LM model represents the intersection of the money market and the goods market. The IS in…

Q: Explain if, and why, you agree, or do not agree, with the following statement [when answering,…

A: Increase in G will increase budget deficit, to finance which, government will resort to borrowing…

Q: Suppose the economy begins with output equal to its natural level. Then, there is a reduction in…

A: The equilibrium level of income in the economy is determined by the intersection of the aggregate…

Q: Suppose there is a decrease in current government spending. Use the real intertemporal model (with…

A: Answer

Q: Question Two a) Use the Keynesian Cross to derive the IS curve

A: IS curve shows combinations of interest rates and levels of output such that planned (desired)…

Q: Consider the Keynesian IS-LM model. How would each of the following scenarios affect output,…

A: IS curve shifts if components of aggregate demand change. LM curve shifts only if money demand or…

Q: Suppose that the Bank of Canada creates a new electronic Loonie. This new system allows everyone in…

A: The IS curve represents various combinations of interest and income along which the product market…

Q: What is the effect of a decrease in government spending in the IS LM model?

A: IS curve: - IS curve shows different combinations of interest rate and the level of GDP where…

Q: Assume you're given the following information about the economy of Jasonia; C = 500+ 0.9YD | 1000 T…

A: Y = C + I + G + (X-IM) where, Y = GDP C = Consumption = 500+0.9YD where YD=Y-T I = Investment =…

Q: Assume an economy is currently operating at point A. Illustrate using the IS-LM model how the policy…

A: Simultaneous equilibrium in both goods and money market is determined by the intersection of the IS…

Q: Suppose in a closed economy, an unexpected pandemic discourages household consumption. i. Use the…

A: When an unexpected pandemic discourages the household consumption, people will demand less goods and…

Q: Let's assume that in the Asgardian's model of the economy the natural rate of interest is denoted as…

A: Aggregate Demand Aggregate demand refers to the overall demand in the economy for output. It is the…

Q: Consider a standard AD-AS model. If the SRAS curve is steep, a temporary tax cut leads to a…

A: The statement is false In the AD-AS model, with SRAS curve being steep, any decrease or cut in…

Q: Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the…

A: The IS curve shows the combination of interest rate and output at which the goods market is in…

Q: Consider the extended IS-LM model analyzed a) Graphically analyze the effect of an increase in the…

A: IS-LM: The IS-LM is a macroeconomic model that represents when the money and product markets…

Q: According to the IS-LM model, what happens to the interest rate,income,consumption and investment…

A: IS-LM model IS and LM model is used to show the relationship between the interest rate and output…

Q: Increases in investment by firms would shift the LM curve to the right. shift the LM curve to the…

A: Net export is the net value derived from the difference between the export and import of the…

Q: Suppose the economy begins with output equal to its natural level. Then there is an increase in…

A: The Short Run equilibrium: it is a situation in which, given the firms in the market, the price is…

Q: Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and no…

A: The gap that depicts when the real actual level of output is less than the potential level of output…

Q: Suppose an economy experiences a period of high growth and low unemployment. Eventually output…

A: High growth and low unemployment occurs when aggregate demand increases, shifting AD curve to right,…

Q: 8- (10 pts) According to the IS-LM model, what happens in the short run to the interest rate,…

A: Since you have posted a question with multiple sub-parts, we will solve first three sub parts for…

Q: what is the impact of a contractionary policy on the U.S. economy from a new keynesian point of…

A: Step 1: New Keynesian Economics provide macroeconomic foundation for the Keynesian economics. Unlike…

Q: Consider a simple macro model with demand-determined output. Which of the following parameters will…

A: Autonomous expenditure refers to expenditures that are not dependent on the level of income, and are…

Q: Draw diagram of a typical IS-LMmodel and indicate the changes in all the variables on the diagram…

A: The IS-LM model describes how goods market and money markets interact to balance the rate of…

Q: This is on the basics of the IS-LM model. The model is given by the following system of equations Y…

A: Capital stock is how much normal and favored shares that an organization is approved to issue —…

Q: Why does interest rate links the two halves of the IS-LM model together?

A: IS-LM is the macroeconomic model which is two dimensional and shows the relationship between the…

Q: In the Keynesian short-run macro model, a fall in the money supply will a)move the economy to the…

A: Aggregate expenditure is the sum of consumption spending, investment spending, government purchases…

Q: The following questions relate to long-run macroeconomic equilibrium and the stock market boom.…

A: Stock-market boom increases the income and wealth of the people and cause increase in the…

Q: According to the IS-LM model, what happens to the interest rate, income and consumption and…

A: The IS-LM model, which stands for "investment-savings" (IS) and "liquidity preference-money supply"…

Q: What would the LM curve look like in a classical world? If this really were the LM curve that we…

A: Economics as a subject deals with the allocation of scarce resources among humans with unlimited…

Q: What key policy recommendations would you make for an economy like this one that is currently…

A: Simultaneous equilibrium in both goods and money market is determined by the intersection of the IS…

Q: Suppose that in Macroland the consumption and the investment have a negative relationship with the…

A: Given: Consumption and investment tend to have a negative relationship with the real interest rate…

Q: If the government decides to increase spending on national defense, then in the IS-LM model the IS…

A: Here, relationship between IS and LM is asked and also asked when there is increase in he government…

Q: According to the Keynesian IS - LM model, what is the effect of the following on output, the real…

Question

Suppose that the economy can be described by a closed-economy IS-LM framework and that is
in a recession. Assume that the IS curve is relatively steep while the LM curve is relatively flat. If
you were to advise the policymakers on which action to take, what would be your advice? Show
graphically.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Suppose that the economy can be described by a closed-economy IS-LM framework and that is in a recession. Assume that the IS curve is relatively steep while the LM curve is relatively flat. If you were to advise the policymakers on which action to take, what would be your advice? Show graphically.
Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the price level also increases increase by 10 percent. Part 1What will be the change in LM curve? What will be the change in equilibrium interest rate and output? Explain properly using a graph?Part 2What will be the change in the AD curve? (Hint: first derive the AD curve from IS-LM model and then consider whether AD will shift to the left or right given the change in LM curve) Given that the SRAS curve is horizontal, what will be the impact of change in AD on price level?
Urgentttt!!! Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
Comparing ModelsWhat are the differences between our Keynesian Cross and the Macro Equilibrium (AS and AD) diagram? Which model has more to offer?
I have to analyze, using the IS-LM model, the macroeconomiceffects of an increase in savings in the short term and its implications for long-term growth. Specifically, I have to suppose that households (consumers) lose confidence and start saving more for any level of disposable income. In terms of total savings and, therefore, of potential long-term growth, is a flat LM curve or a positive sloping LM curve better, in which investment was assumed to be exogenous?
Assume an economy is currently operating at point A. Illustrate using the IS-LM model how the policy recommendations you provide in c) will impact the economy. On your diagram indicate the new point that the policy takes the economy to and label this as point B.
Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…
Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
How does the classical business cycle analysis change the IS-LM modelto make it different from a more Keynesian one?
Assume a Keynesian model of a small open economy. The world interest rate is given rw = 0.05. Money demand is given by the equation: Md = 20+0.5Y –40rw. Money supply is 800. The marginal propensity of consumption is 0.8. (a) Find the equation for the LM curve. (b) Find Y . (c) Assume the economy has flexible exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? 1/3 Due on Monday, 11/16 @ 9:00 a.m. iii. Has the exchange rate appreciated, depreciated, or stayed the same? (d) Assume the economy has fixed exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? iii. What is the new value of the Money supply?
Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in taxes and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
Assume an economy is currently operating at point A and answer the following question. Q. What key policy recommendations would you make for an economy like this one that is currently operating at point A? Illustrate using the IS-LM model how the policy recommendations you provide will impact the economy. On your diagram indicate the new point that the policy takes the economy to and label this as point B.