What is the impact of monetary and fiscal policy if (a) money demand does not depend on income, LM curve is horizontal; and (b) If money demand is extremely sensitive to interest rate, LM curve is horizontal.
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What is the impact of monetary and fiscal policy if (a) money
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- Determine whether each of the following statements is true or false, and explain why. For each true statement, discuss the impact of monetary and fiscal policy in that special case. a) If money demand does not depend on income, the LM curve is horizontal. b) If money demand is extremely sensitive to the interest rate, the LM curve is horizontal.Discuss the impact of monetary and fiscal policy in each of these special cases:4. 1.1. If investment does not depend on the interest rate, the IS curve is vertical.4.1.2. If money demand does not depend on the interest rate, the LM curve is vertical.Are the following statements True, False or Uncertain? Justify you answer for each of the statements. If the government increases both Tax and Expenditure by equal amount, then there will be no increase in income in the Keynesian model. If money demand does not depend on interest, them LM curve is vertical.
- Consumption function C=250+0.6(Y-T) Investment I=100-20r Money demand function (M/P)=Y-20r a. Government purchases and taxes are both 100. In the accompanying diagram, graph the IS curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. b. The money supply M is 2,875 and the price level P is 5. In the accompanying diagram, graph the LM curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. c. Find the equilibrium interest rate, r, and the equilibrium level of income Y.Using the IS LM model, show how expansionary monetary and expansionary fiscal have same effect on output but opposite impact on interest rates. b. Derive the equations for IS and LM curves from the set of equations given below: C = 80+ 0.75Yd I = 300-200 i G is government expenditure G = 30 T = 30 where T= taxes Ms = 270 where Ms is money supply Md = 150+ 0.30Y – 300i Find the volume of investment at equilibrium . What would be the impact on investment if Money supply is increased to 300.What are the pros and cons of studying the IS-LM Model?Why is the IS curve called the goods market equilibrium schedule?Why is the LM curve called the money market equilibrium schedule?Explain how the equilibrium levels of income and the interest rate change if there is an increase in autonomous investment ( or government spending).Derive the AD curve from the IS-LM model.
- In the goods-and-services market actual inventories have started to rise above optimal inventories. What could have happened to autonomous money demand to bring this about? Explain and diagrammatically represent your answer. In doing so, be sure to explain and diagrammatically represent what happens to the rate of interest, investment, and Y. In explaining what happens to Y, be sure to fully explain the equilibrium process in the simple Keynesian modelIf money demand does not depend on income then the IS/LM model predicts that there would be no crowding out of investment if government expenditure is increased. True or false?Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T)I = 1000 - 300?G = 1000T = 1200MD = 0.5Y - 200rM = 5000P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer. (e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written…
- In the IS/LM model explain what happens to equilibrium output and interest rate if government simultaneously pursues expansionary fiscal policy and the central bank opts for a contradictionary monetary policy. Show with the help of a graph along with a very brief verbal explanation.In a small closed economy, its aggregate demand and output are given as the equations below, Y = C + I + G; national output or GDP. C = 100 + 0.5(Y-T); consumption, marginal propensity to consume MPC = 0.5. I = 150 – 10*r; investment is a negative function of real interest rate (r as %). (M/P)d = Y – 20*r; real money demand which is adjusted by price level (inflation). G = 200; as government spending. T = 200; as tax. M = 2,400; as money supply. P = 4; the price level. (1) With the equations above, try to derive the IS curve. Tip: recall IS curve represent the relation between national output (Y) and real interest rate (r) in goods market. To derive IS curve, you need to put all components of Y together and find its connection with r. (2) Use the same equations, now try to derive the LM curve. Tip: recall LM curve represent the relation between national output (Y) and real interest rate (r) in money market. So to derive LM curve, you need to consider money supply and demand.…Suppose the current level of output and the interest rate are such that the economy is operating on neither the IS nor LM curve. Which of the following is true for this economy? A) Production does not equal demand. B) The money supply does not equal money demand. C) The quantity supplied of bonds does not equal the quantity demanded of bonds. D) Financial markets are not in equilibrium. E) all of the above