12% Md 11% MS 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $million he graph above shows a Keynesian liquidity preference model. Consider three cenarios: cenario 1: Credit risk increases and as a result some people try to get rid of their Interest Rate
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- 3. a) What does the Keynesian Theory of Liquidity Preference say?b) Suppose the government of a country increases spending on roads and highways by 1000 crore taka. Show graphically and explain why might this shift be larger than 1000 crore taka.Question 4. (1) As discussed, the IS-LM model can explain the impact of fiscal policy to aggregate output (Y). For the IS curve, government purchase (G) is an endogenous or exogenous variable? How a lower government purchase G would affect Y? How to illustrate the change graphically? (2) For the LM curve, use your language to explain how the supply of real money balance is related to total money supply (M) and the price level (P). For M and P, which one is endogenous or exogenous to the LM model? (3) Use your language to explain how to derive the aggregate demand (AD) curve from the IS- LM model? How the AD curve is sloped and why?Instructions: Please read all questions carefully and make sure you understand the facts before you begin answering. Write legibly and be as concise as possible. 1. Using the ISLM model, show graphically, and explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change? 2. Explain the difference between Keynesian economics and Classical economics by mentioning the complete name of the economist who develops the theory/model. 3. Describe each of the components of the GNP equation and which one you feel can distort GNP the most. 4. With the topics discussed within Macroeconomics, which topic do you feel is most influential on our nation’s economy? Describe the topic and then use 5 bullet points to defend your position? 5. Draw the graph of the Keynesian cross model as a comparison of planned and realized expenditures. What is the intercept of the planned expenditure line?…
- Assume we combine contractionary fiscal policy with expansionary monetary policy. The result is of this policy mix is O higher interest rates and lower output O higher interest rates and an indeterminate level of output O lower interest rates and an indeterminate level of output lower interest rates and higher outputThe current Ukraine-Russia War threatens the prosperity of the global economy, and as such, the UK economy. You are working as an Economist for the HM Treasury and a panel of Members of Parliament. have asked you to provide guidance on the current situation of the economy and potential demand side and supply side policy interventions to stabilise the economy. Using economic theory, answer the following:QUESTION 8 expenditures, income 120 110 100 28888888 QUESTION 9 90 80 70 60 50 40 30 20 10 0 ▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬ 08. Which of the following could have caused a shift of the Aggregate Expenditures curve from AE1 to AE2? O (a) an increase in the price level (b) an increase in the rate of interest O (c) an improvement in consumer confidence O (d) a contractionary monetary policy 0 10 20 30 40 50 60 70 80 90 100 110 120 income: Q 2006 NATIONAL INCOME DATA (billions of dollars) Personal consumption expenditures Gross private domestic investment Exports Imports 9277.2 2701.0 1470.2 2256.6 Government consumption expenditures and gross investment Capital consumption allowances (depreciation) 953.3 Survey of Current Business, National Income and Product Accounts, Tables 1.1.5 & 7.13 09. The Net Domestic Product is: O(a) 19282.1 O (b) 17025.5 O (c) 16072.2 (d) 13815.6 O(e) 12862.3 AE2 AE 1 2623.8
- Suppose that the current money market equilibrium features an interest rate of 5 percent anda quantity of $2 trillion. If the Fed raises the discount rate, which of the following is mostlikely to be the new money market equilibrium? Group of answer choices An interest rate of 4 percent and a quantity of $2.5 trillion. An interest rate of 6 percent and a quantity of $1.5 trillion. An interest rate of 3 percent and a quantity of $3 trillion. An interest rate of 5 percent and a quantity of $2 trillio1. A fiscal expansion coupled with a monetary expansion must always causea) Output to riseb) Output to fallc) Interest rates to rised) Interest rates to fall 2. Autonomous consumption isa) a function of disposable incomeb) a function of national incomec) a function of GDPd) a function of savinge) independent of the level of income 3. Monetary policy loses its effectiveness in all of the following situations EXCEPTa. When the IS curve is vertical.b. When the LM curve is nearly horizontal.c. When interest rate controlled by the Fed reaches zero.d. When the IS curve is horizontal. 4. In a small open economy, if the government adopts a policy that lowers imports, then that policy: a) raises the real exchange rate and increases net exports. b) raises the real exchange rate and does not change net exportsc) raises the real exchange and decreases net exportsd) lowers the real exchange rate 5. An increase in the trade surplus of the a small open economy could be the result of a. a domestic…Given: C = 100 + 0.65Yd (where Yd = Y-T) I = 120-400i G = 200 T = 20 + 0.2Y Ms/P = 200 Md/P = 50+0.5Y-600i Where: C = Consumption Y = Income I = Investment G = Government spending T = Taxes i = interest rate Ms/P = RealMoney Supply Md/P = Real Demand for Money (a) Derive the IS and LM curves (b) Obtain the equilibrium level of: i. Income ii. and consumption
- Problem 26-11 (algo) For the economy described below: C = 2,500 + 0.9(Y - T) - 8,000r IP = 2,200 - 8,000r G = 2,500 NX = 0 т 3,600 a. Suppose that potential output Y* equals 31,600. What real interest rate should the Fed set to bring the economy to full| employment? You may take as a given that the multiplier for this economy is 10. Instructions: Enter all your responses as whole numbers. Real rate of interest: 5 O % b. Suppose that potential output Y* equals 26,800. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10. Real rate of interest: 8 O % c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy is at potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the economy is at full employment. Planned investment P= 3160 * National saving S= 31601. The monetary transmission mechanism can be depicted in the form of a graph or using symbols.Explain, with the aid of symbols, the monetary transmission mechanism when interest rates increase (Note: Prices and wages are variable.)2. Explain, using the AD‐AS model, how the South African Government can use fiscal policy as a tool to recover from the negative effects of this COVID‐19 pandemic.Your answer must include the following: The description of the type of fiscal policy required; An explanation of how the implementation of this tool will work their way through the economy to achieve the desired effect; The AD‐AS graph showing the implications of your recommendations. (5)Marks will be awarded for your ability to integrate theory with the scenarioprovided.During the Bush administration, several factors contributed to an increase in government deficits, including a recession, a tax cut, and an increase in government spending. Move the supply curve, the demand curve, or both to describe the expected effect this increase in the deficit would have upon the market for savings. Real interest rate Supply X Savings and investment Demand According to this model, an increase in deficit spending will result in O a decrease in private investment as the cost of borrowing increases. O an increase in private investment as the cost of borrowing decreases. O a decrease in private investment as the cost of borrowing decreases. O an increase in private investment as the cost of borrowing increases.