Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the price level also increases increase by 10 percent. Part a What will be the change in LM curve? What will be the change in equilibrium interest rate and output? Explain properly using a graph?
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- Explain if, and why, you agree, or do not agree, with the following statement [when answering, assume that, in each time period, the economy is described by a static IS-LM model, with consumption and investment depending on contemporaneous variables only]:"In a closed economy wherke the central bank chooses the money supply, the prices of stocks at time t, €Qt, will unambiguously rise if, from time t onwards, government purchases of goods and services, G, go up".Use the IS–LM model to predict the short-run impact on the interest rate and output if the central bank pushes interest rates down at the same time that both consumption and investment fall due to a financial crisis. Illustrate your answer graphically. Be sure to label:the axesthe curvesthe initial equilibriumthe direction the curves shift.2. Consider the following IS-LM model: C = 200+ 0.25Yd I = 150+ 0.25Y 1000i G = 250 T = 200 b. d = 2Y - 8000i MS 3200 and P = 2 a. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I and G. M Now that the money supply increases to suppose 1,840. Solve for equilibrium Y, į c, and T, and describe in words the effects of an expansionary monetary policy on the equilibrium Y, i, c, and T. = c. Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Solve for the new equilibrium Y, į, and C. Summarize the effects of an expansionary fiscal policy on Y, i, and C.
- Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the price level also increases increase by 10 percent. Part 1What will be the change in LM curve? What will be the change in equilibrium interest rate and output? Explain properly using a graph?Part 2What will be the change in the AD curve? (Hint: first derive the AD curve from IS-LM model and then consider whether AD will shift to the left or right given the change in LM curve) Given that the SRAS curve is horizontal, what will be the impact of change in AD on price level?. Suppose that there is an increase in the price of housing, which the central bank judges is atemporary asset price bubble. In the New Keynesian model, determine the central bank’s optimalresponse to this asset price increase, using diagrams. Discuss your results.Consider the following IS-LM model:C=200+0.25YdI=150+0.25Y-1000iG=250T=200Real Money Demand=M/P=2Y-8000iReal Money Supply=1600a. Derive the IS relation.b. Derive the LM relation.c. Solve for equilibrium real output and interest rate and show it in a graph, draw IS and LM curves.d. Solve for values of C, G and I and verify that they add up to Y you obtained in part c.e. Now suppose that the money supply increases to M/P=1840. Solve for Y, i, C and I and describe inwords the effects of an expansionary monetary policy. Show the change in a graph.f. Set M/P to its initial value of 1600. Now suppose that government spending increases to G=400.Summarise the effects of an expansionary fiscal policy on Y, i, C. Use a graph to show the shift in ISand/or LM.
- Using the IS LM model, show how expansionary monetary and expansionary fiscal have same effect on output but opposite impact on interest rates. b. Derive the equations for IS and LM curves from the set of equations given below: C = 80+ 0.75Yd I = 300-200 i G is government expenditure G = 30 T = 30 where T= taxes Ms = 270 where Ms is money supply Md = 150+ 0.30Y – 300i Find the volume of investment at equilibrium . What would be the impact on investment if Money supply is increased to 300."that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money" do you agree or disagree with this statement? provide two reasons why?According to the IS-LM model, a. what happens to the interest rate, income, and investment when government spending decreases? b. how the Fed should adjust the money supply to keep income at its initial level. What happens to the interest rate as a result? c. If the Fed's goal is instead to hold the interest rate constant, explain in words how the Fed should adjust the money supply when government spending decreases. What happens to income as a result? d. What is the Fed's dilemma?
- 4. Consider the following IS-LM model: Consumption:C = 200 + .25YD Investment : I = 150 + .25Y -1000i Taxes : T = 200 Government Expenditures : G = 250 Demand for Real Money Balances : (M/P)d = 2Y -8000i Money Supply : M/P = 1600 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) 9-C-1+G Y= 200 0.25 (Y-200) + 150 0.25 4-1000(1) +250+ Y- 200 0.254-50+1500. 25Y- 1000i+250G 93D550-1000 b. Derive the LM relation. (Hint: Write this equation with i on the left side and everything else on the right.)Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve. Furthermore, Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve. According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?a. The central bank increases the money supply.b. The government increases government purchases.c. The government increases taxes.Consider an IS-LM model. Suppose the central bank increases the money supply by 5 percent. But the price level also increases increase by 10 percent. A) What will be the change in LM curve? What will be the change in equilibrium interest rate and output? Explain properly using a graph? B) What will be the change in the AD curve? (Hint: first derive the AD curve from IS-LM modeland then consider whether AD will shift to the left or right given the change in LM curve) Given that the SRAS curve is horizontal, what will be the impact of change in AD on price level?