Use the IS-LM model to illustrate graphically the final impact of the reduction in government spending on output and interest rates under two possible scenarios: 1) The Central Bank holds the money supply constant. 2) The Central Bank holds the level of output constant.
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Use the IS-LM model to illustrate graphically the final impact of the reduction in
government spending on output and interest rates under two possible scenarios:
1) The Central Bank holds the money supply constant.
2) The Central Bank holds the level of output constant.
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- Consider 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?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.Use the IS-LM model to illustrate graphically the final impact of the reduction in government spending on output and interest rates under two possible scenarios: i) The Central Bank holds the money supply constant. ii) The Central Bank holds the level of output constant.
- Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8 (Y-T) I = 500 - 10r M P = 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whe her the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. 2. 1. What is…According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph (hand-drawn). Also, make sure to include a very short qualitative analysis of the policies, showing the chain effects of the variables discussed. Do not overwrite!a. The central bank decreases the money supply - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)b. A housing market crash that reduces consumer wealth - Short-run and Long-run effects (transition from SR to LR) of this shock (Use AD-AS plus IS-LM model for this part)c. The government increases taxes - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)d. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems - Short-run and Long-run effects…Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y - T) I= 500-10r M b) P = 0.1Y - 35r G = 800 T = 200 1. 2. M Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. = 1000 P = 2 a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. c) Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50. What is…
- Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000i G = 250 T = 200 i = .05 (i has a bar over it) a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the…Q2-20 Other things equal, if the demand for money becomes more elastic, then the LM curve will become _______.In other words, a given rise in the interest rate will, in order for money market equilibrium to be preserved, be associated with a ________ rise in income. Select one: a. less elastic / smaller b. less elastic / larger c. more elastic / smaller d. more elastic / largerConsider a closed economy where the goods and money markets are described by the following relationships: C 500+ 0.8 (Y-T) I= 500 10r M P a) 0.1Y35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). mpute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output. e) Suppose that, instead of relying on monetary policy, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy. f) An…
- Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y-T) 500 - 10r I M P = = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. d) If the Central Bank intends to pursue monetary policy in order to restore output to the same level before the fall in consumer confidence, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism e) Suppose that, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy.Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y – T) I = 500 10r M P = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate.What 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.