A housing bubble has burst, causing a negative wealth effect. Use the IS-LM model to answer the following: a) What happens to output and the real interest rate? Draw an IS-LM diagram to illustrate your answer. Begin with the economy at full employment output. Be sure to include the FE line in your diagram. b) What sort of fiscal policy is appropriate to restore full employment output? State specifically what the government should do. (Do not add this to your diagram.) c) What sort of monetary policy is appropriate to restore full employment output? State specifically what the central bank should do. (Do not add this to your diagram.) d) Suppose neither the government nor the central bank take any action. How will the economy return to full employment output? Add this to your diagram
A housing bubble has burst, causing a negative wealth effect. Use the IS-LM model to answer the following: a) What happens to output and the real interest rate? Draw an IS-LM diagram to illustrate your answer. Begin with the economy at full employment output. Be sure to include the FE line in your diagram. b) What sort of fiscal policy is appropriate to restore full employment output? State specifically what the government should do. (Do not add this to your diagram.) c) What sort of monetary policy is appropriate to restore full employment output? State specifically what the central bank should do. (Do not add this to your diagram.) d) Suppose neither the government nor the central bank take any action. How will the economy return to full employment output? Add this to your diagram
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 5SQP
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- A housing bubble has burst, causing a negative wealth effect. Use the IS-LM model to answer the following:
- a) What happens to output and the real interest rate? Draw an IS-LM diagram to illustrate your answer. Begin with the economy at full employment output. Be sure to include the FE line in your diagram.
- b) What sort of fiscal policy is appropriate to restore full employment output? State specifically what the government should do. (Do not add this to your diagram.)
- c) What sort of
monetary policy is appropriate to restore full employment output? State specifically what the central bank should do. (Do not add this to your diagram.) - d) Suppose neither the government nor the central bank take any action. How will the economy return to full employment output? Add this to your diagram.
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ISBN:
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