Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 13, Problem 5AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to Y∗.Y*.
Suppose the world price for raw materials rises because of growing demand for these products. Given that Canada is a net exporter of raw materials, what is the likely effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming no change in the exchange rate).
Suppose instead that there is an increase in the demand by foreigners for Canadian financial assets such as government bonds. What is the direct effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming again no change in the exchange rate).
Both of the shocks described above are likely to cause an appreciation of the Canadian dollar on foreign-exchange markets. As the Canadian dollar appreciates, what are the effects on aggregate demand in part (a) and in part (b)? Show these “secondary” effects in your diagram and explain.
Given your…
Assume that a closed economy finds that households have become wealthier. Which one of the following options correctly describes the effects of this increase in wealth on the equilibrium interest rate and level of output in the IS-LM model?
(a)
Equilibrium output and income will decrease as the interest rate increases;
(b)
Equilibrium output and income levels will increase and the interest rate will remained unchanged;
(c)
Equilibrium output and income will decrease but the interest rate will remain unchanged;
(d)
Equilibrium output and income will increase as the interest rate decreases.
I have to analyze, using the IS-LM model, the macroeconomic effects of an increase in savings in the short term and its implications for long-term growth. Specifically, I have to suppose that households (consumers) lose confidence and start saving more for any level of disposable income.
Can you please answer the following question (using graphs too):
How does the loss of consumer confidence affect production, investment andprivate savings? Does the attempt to save more necessarily lead to increased savings? Or will it lead to a decrease in savings?
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- Given flexible exchange rates and perfect capital mobility, what will be effect of an expansionary fiscal policy on output and price? Use IS-LM and AD-SRAS-LRAS diagrams to answer this question.arrow_forwardThe US Government is facing major budget deficit deciding between implementing fiscal and monetary policy to boost output back to potential output. In the presence of expectations, using the IS-LM model graph the effects on the US economy from a contractionary fiscal policy? What would happen if this change is perceived as permanent by investors? Graph and explain. What would happen if the government was perceived as wasteful? Graph and explain.arrow_forwardIf the government decides to increase spending on national defense, then in the IS-LM model the IS curve will shift right, the equilibrium interest rate will increase and the equilibrium output will go up. True or Falsearrow_forward
- Consider a macroeconomic model for an open economy with the government. Consumption is given by C = 250 + bYd, where b = 0.8, Yd = (1-t)Y, and t = 0.1. Investment is given by I = 1,200 – 2,000R, and net export is given by X = 525 – 0.1Y – 500R. Assume that G = 1,200. Money demand is given by (Md/P) = 0.1283Y – 1,000R. Assume that P = 1, and the fixed money supply is given by (Ms/P) = 900. Drive the expression for the IS curve from the model. Drive the expression for the LM curve from the model. Drive the IS-LM equilibrium from the model.arrow_forwardThe following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram. >>) Suppose after the government has implemented the reduction in taxation that the central bank wants to keep the level of investment at the same level as before the tax reduction. How can the central bank intervene in the market to achieve this goal? Explain and illustrate graphically how the central bank can keep investment at the same level as before. Is there any additional impact of the central bank intervention on output, consumption and interest rates? If so what is the impact?arrow_forwardI have to analyze, using the IS-LM model, the macroeconomiceffects of an increase in savings in the short term and its implications for long-term growth. Specifically, I have to suppose that households (consumers) lose confidence and start saving more for any level of disposable income. In terms of total savings and, therefore, of potential long-term growth, is a flat LM curve or a positive sloping LM curve better, in which investment was assumed to be exogenous?arrow_forward
- A few months ago, persons were hoping and praying for a vaccine to be developed to fight against Covid 19. The good news is that there is now a vaccine and some countries have approved the use of said vaccine. Assume that governments will have to finance the purchase of the vaccine and that in order to finance the purchase of the vaccine Caribbean governments will have to take a loan from China. a. Using the IS-LM model, explain the impact of the government spending on vaccine on interest and income. b. Discuss THREE possible impacts that borrowing from China could have on a Caribbean country of your choice.arrow_forwardY5 Consider an AS-AD model for the U.S. Suppose an economic expansion in Mexico increases income for the average Mexican household. Mexico is a large trading partner with the US. This expansion would cause: a. the U.S. price level to rise and real GDP to fall. b. the U.S. price level and real GDP to increase. c. the U.S. price level to fall and real GDP to rise. d. the U.S. price level and real GDP to fall.arrow_forwardAccording to the IS-LM model, what happens to the interest rate, income and consumption and investment under the circumstance that (a) the Central bank increases supply of money, and (b) the government increase government purchases?arrow_forward
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