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7.4.
What does the B curve reflect and what do points on, below and above
the BP curve indicate?
Step by step
Solved in 2 steps
- 81.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P), and the IS curve is given by Y = 8,000 – 2,000r + u, where u is a shock that is equal to +200 half the time and –200 half the time. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there. ii. Manipulate M from day to day to keep the interest rate constant at 2 percent. a.Under rule i, what will Y be when u = +200? What will Y be under rule i when u = –200? b.Under rule ii, what will Y be when u = +200? What will Y be under rule ii, when u = –200? c.Which rule will keep output closer to 4,000? 82.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P) + u, where u is a shock that is equal to +200 half the…What is Aggregate Demand (AD), making sure to list its spending components, and explain why is AD curve downward sloping? (11.2)What is the Keynesian zone of the SRAS curve? How much is the price level likely to change in the Keynesian zone?
- In the AD/AS model, what prevents the economy from achieving equilibrium at potential output?If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.If the economy is operating In the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?