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What would happen when there are money demand shock and money supply shock? Explain it by using IS-LM and AD-AS framework.
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- Suppose now that economists expect the velocity ofmoney to increase by 50% as a result of the monetarystimulus. What will be the total increase in nominalGDP?Assume that as a consequence of an IS shock the economy is initially at a point with output above equilibrium (y > ye), and inflation of 4% above a 2% target. By means of a diagram, explain how the central bank will respond to this new information about economic conditions and discuss the effects on the economy.Consider an economy in the long run. Using the dynamic ADAS model, if the Fed lowers its target real LR interest rate: LRAS shifts rightward LRAS shifts leftward DAD shifts rightward DAD shifts leftward
- Consider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)COURSE: MACROECONOMICS - IS-LM MODEL Analyze and plot IN DETAIL the effect on the money market caused by an increase in the sensitivity of money demand to the level of income (i.e. "k*Y" in the equation of the money Market L = k*Y - h*i). Then, explain and plot how the equilibrium changes in the IS-LM model.Above is a graphical model of the AS-AD. In this model the initial level of the economy is at the low output and low inflation. Describe what happens to the economy when the Central Bank decides to lower interest rate and most likely this will lead to an increase in money supply thereafter. a. What happens to the aggregate demand? b. What happens to the level of output? c. What happens to the price level? d. Effect of the monetary policy made by the Central Bank?
- Critically discuss why oil price shocks in the US may have had different effectsin the 1970s versus the 2000s before the Financial Crisis. Use three-panelgraphs of the IS-LM-PC model and graphs of inflation over time to help explainyour answeAs monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y-Yp), and that the monetary rule is given byr=1+0.3 π. Suppose the economy is suffering a decrease in the potential level of output, due to some ill-designed new regulation. According to the AD- AS model, what is more suitable to offset the subsequent decline in output, an expansionary monetary policy or an expansionary fiscal policy?
- True or False Explain why, Use basic AD/ AS model Suppose that there is a decline in velocity (that is, money demand decreases). This would cause the price level and income to fall in both the short run and long runSuppose country A has a central bank with full credibility, and country B has a central bank with no credibility.Using a graph of aggregate demand and supply EXPLAIN how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the samea)negative temporary aggregate supply shock?Use the Phelps-Friedman model to trace through the effects of a shock involving an increase in the money supply. Graphically illustrate (including an IS-LM figure) and fully explain your work.
