Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Chapter 10, Problem 4AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Students have asked these similar questions
In this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017.
According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams - one for the loanable funds market and one for the labour market.
are these the correct answers?
1) In the classical view, if savings exceeds investment borrowing in the economy interest rates will fall.- true
2) The self adjustment process began with falling wages and then allowed for prices to fall and sales to increase. -true
3)In the classical model, a reduction in AD leads to a new equilibrium at a very low rate of output and employment. -false
Which of the following statements about Fiscal Policy is INCORRECT
(a) In order to combat inflation, the South African Reserve Bank must apply a contractionary fiscal policy;
(b) A contractionary fiscal policy can result in higher levels of unemployment;
(c) Expansionary fiscal policy will increase the budget deficit;
(d) The application of fiscal policy will have no effect on aggregate supply in the AD‐AS model.
If the inflation rate is 6% and Susan receives a 6% increase in income, then, over the year, Susan’s:
(a) Real and nominal income both remain unchanged;
(b) Real and nominal income both rise;
(c) Real income rises but nominal income remains unchanged;
(d) Nominal income rises but real income remains unchanged.
Given the import function, Z = 300 + 2/3Y, which of the following statements is correct?
The marginal propensity to save is 1/3;
The induced component is 300;
2/3 is the proportion of any income spent on imports;
None of…
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Macroeconomics (9th Edition)
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- Assume that the current unemployment rate in Country A is lower than the natural rate of unemployment. Draw a single correctly labeled graph with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point Z. Identify a specific fiscal policy action that would bring the economy to full employment. Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from part (b) on the real interest rate in the short run. Now assume instead that there is no fiscal policy action. Will the short-run Phillips curve shift to the right, shift to the left, or remain the same over time? Explain.arrow_forwardIs the following true, false or uncertain? Assume that workers supply effort based on their expected real consumption wage and consume a basket with a non-negligible component of imported goods and services. The government in an open economy implements a contractionary fiscal policy (from an initial medium-run equilibrium) motivated, for example, by its desire to reduce national debt. This leads to lower real wages and higher unemployment in equilibrium. Hint: you may want to compare this with the case in which the initial two assumptions do not hold. Use graphs if possible.arrow_forwardAssume that the current unemployment rate in Country A is lower than the natural rate of unemployment. A. Draw a singly correctly labeled graph with both the long run Phillips Curve and the short run Phillips Curve. Label the current short run equilibrium point Z. B. Identify a specific fiscal policy action that would bring the economy to full employment. C. Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from Part B on the real interest rate in the short run. D. Now assume instead that there is no fiscal policy action. Will the short-run Phillips Curve shift to the right, shift to the left, or remain the same over time? Explain. Note: Please answer just Alphabet D. Thank youarrow_forward
- Assume that the current unemployment rate in Country A is lower than the natural rate of unemployment. A. Draw a singly correctly labeled graph with both the long run Phillips Curve and the short run Phillips Curve. Label the current short run equilibrium point Z. B. Identify a specific fiscal policy action that would bring the economy to full employment. C. Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from Part B on the real interest rate in the short run. D. Now assume instead that there is no fiscal policy action. Will the short-run Phillips Curve shift to the right, shift to the left, or remain the same over time? Explain.arrow_forward“Expansionary fiscal policy is more effective in influencing the aggregate income level when investment is interest-elastic”. Do you agree with this statement? Why and why not? Explain your answer based on the IS-LM framework.arrow_forwardIn this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017. a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams - one for the loanable funds market and one for the labour market. b) (Continued from part a) As time passes (i.e., in the very long run which will be 10-15 years from now), what happens to the stocks of productive inputs in Canada? How would this change in the stocks of productive inputs affect the equilibrium levels of output and real interest rate in Canada? What happens to the real wage in Canada? Explain, and support your answer by a new set of loanable funds market and one for the labour market diagramsarrow_forward
- Which of the following would be a fiscal policy prescription for ending inflation? A) Raise taxes B) Increase government expenditures to let the multiplier work C) Raise interest rates to stimulate saving D) Promote exports to increase injections in the domestic economyarrow_forward"Fine-tuning" the economy (a) Has worked to keep the economy stable ever since we discovered Keynesian policy (b) Is difficult to accomplish with discretionary macroeconomic policy because the time lags involved in economists recognizing the economy changed direction, policy makers devising and implementing appropriate policies, and the policies impacting the economy are longer than the average recession. (c) Might work better were we to strengthen and enact more automatic stabilizers. (d) All the above (e) (b) and (c) are correctarrow_forwardThe impact of Keynesian Policy can be diminished by secondary effects such as: a)Inflation – to the extent increasing Aggregate Demand causes inflation the impact on expanding the economy is dissipated by higher product prices b)Crowding-out effect of expansionary fiscal policy - To the extent expansionary Keynesian policy requires a government budget deficit and if this is financed by government borrowing, it may lead to rising interest rates, which will decrease private borrowing to finance investment spending as well as some consumption spending. c)Crowding out effect of monetary policy – As Expansionary policy leads to greater spending, the demand for money for transactions purposes (to buy products) increases, which may increase the interest rate which will crowd out private spending. d)All the above e)(a) and (b) onlyarrow_forward
- Using the AD/AS Model, construct 2 graphs that show how a recession can occur. Explain how discretionary fiscal or monetary policies can be used to move the economy out of recession. • Using the AD/AS Model, construct 2 graphs that show how higher rates of inflation can occur. Explain how discretionary fiscal or monetary policies can be used to bring down the inflation rate. • In times of recession what can government do to lessen the economic hardship faced by those who lost their jobs?arrow_forwardKeynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to do nothing, because the economy is self-adjusting. raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences. increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences. reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.arrow_forwardWhether the following statement is true, false or uncertain? And Why is this so? Use graphs if needed. Assume that workers supply effort based on their expected real consumption wage and consume a basket with a non-negligible component of imported goods and services. The government in an open economy implements a contractionary fiscal policy (from an initial medium-run equilibrium) motivated, for example, by its desire to reduce national debt. This leads to lower real wages and higher unemployment in equilibrium. Hint: you may want to compare this with the case in which the initial two assumptions do not hold.arrow_forward
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