5) a) Suppose there is an increase in consumer optimism about the future (often called an increase in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS- LM diagram. What is the effect on output and the interest rate? b) Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the increase in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the increase in confidence and the Federal Reserve policy? How is consumption affected?

5) a) Suppose there is an increase in consumer optimism about the future (often called an increase in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS- LM diagram. What is the effect on output and the interest rate? b) Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the increase in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the increase in confidence and the Federal Reserve policy? How is consumption affected?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 7PA

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