Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 12, Problem 9PA
(a)
To determine
The impact of money demand functions on the changes in the government expenditure analysis.
(b)
To determine
The impact of money demand functions on the changes in the taxes analysis.
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True or False with explanation;
1) With a horizontal LM curve, the amount of money in the economy is constant along the LM curve.
If 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?
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 model
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- Consider an economy described by the following equations. Y= C + I + GC= 100 + .75 (Y - T)I= 500 - 50rG= 125T= 100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Answer the questions based on the following equations above. a. What is the value of the multiplier? b. What is the equilibrium equation for Y? Show your solution. c. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output? Show your solution. d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output. Show your solution. e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.arrow_forwardUse an ISLM model to analyze the effects of a money supply increase on the interest rate and GDP, when the IS curve is quite steep and the LM curve is quite flatarrow_forwardConsider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much?b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?arrow_forward
- 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.arrow_forwardWhat 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.arrow_forwardConsider 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…arrow_forward
- Economist will focus on achieving macroeconomic goals. There are four major economic goals namely as full employment, price stability, economic growth and equitable distribution of income. However, it is impossible for a government to achieve all four macroeconomic goals simultaneously. Briefly discuss how a government will not be able to implement two particular goals at the same time. According to Keynes, people have demand for money due to three different motives foe holding money rather than other forms. Hence, identify the THREE (3) motives according to Keynesian approach.arrow_forwardDetermine 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.arrow_forwardUse an ISLM model to analyze the effects of a money supply increase on the interest rate and GDParrow_forward
- Use an ISLM model to analyze the effects of a money supply increase on the interest rate and GDP, in the case where the IS curve is quite flat and the lM curve is quite steeparrow_forward) Derive (again!) the LM curve from considering how income increases affect moneydemandarrow_forwardKeynes hypothesized that the speculative component of money demand was primarily determined by the level of Oa. interest rates. Ob. stock market prices. c. income. Od. velocity of money. Clear my choice Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
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