How different are approach in IS-LM model compared to classical theory which implies adjustment of interest rate and prices to satisfy IS and LM equations?
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- Which assumption of HO cannot be used in Classical model as it eliminates the basis for international tradeHow does the classical business cycle analysis change the IS-LM modelto make it different from a more Keynesian one?Consider a closed economy, Lone. To tackle the severe recession, hergovernment conducts a tax rebate to the households. Assume that the central bank is independent on the government decision. Use the IS-LM model to explain how this government act affects the interest rate, investment and income of Lone. Evaluate the effectiveness of the above policy in tacking the recession if investment demand in Lone is interest elastic. Explain in words.
- .ll KKTCELL 11:56 %70 A moodle.eul.edu.tr Teams Assume a technological advance lead to lower production costs. Show the effect this will have on national income, unemployment, inflation, and interest rates with the help of an AD-AS diagram, assuming classical model. DRAW FULL LABELED DIAGRAM ON A PAPER, EXPLAIN AS ASKED IN THE QUESTION, THEN TAKE A PICTURE OF YOUR HANDWRITING TO ATTACH YOUR ANSWER.Suppose that in Macroland the consumption and the investment have a negative relationship withthe real interest rate and positive relationship with Y. The Central Bank of the country targets acertain nominal interest rate and lets the money supply adjust in order to reach that interest rate.a. Draw a graph of the IS-LM model in this situation.b. Suppose that the Central Bank announces an increase of the interest rate in the future.Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of thefuture, after the announced increase in the interest rate is implemented. (Assume that the ISis constant.).c. Suppose that agents today take into consideration the resulting income of the future whendeciding the amount of consumption and investment. Show what happens to the IS-LMcurves today after the announcement of the CB (tip: the CB is NOT increasing the nominalinterest rate today).d. The government decides to step in and avoid any deviation of Y from the initial…Explain in detail how real business cycle theory is different from the rational expectaion theories of business cycle.?
- In the 1970s a common practice was to estimate a distributed lag modelrelating changes in nominal gross domestic product (Y) to current andpast changes in the money supply (X). Under what assumptions will thisregression estimate the causal effects of money on nominal GDP? Arethese assumptions likely to be satisfied in a modern economy like that ofthe United States?Which assumption of HO cannot be used in Classical model as it eliminates the basis for international trade. Explain.Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. b. How does the misperception theory work? c. Which of the three markets discussed in class is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply.
- Assume a technological advance lead to lower production costs. Show the effect this will have on national income, unemployment, inflation, and interest rates with the help of an AD-AS diagram, assuming classical model.DRAW FULL LABELED DIAGRAM ON A PAPER, EXPLAIN AS ASKED IN THE QUESTION, THEN TAKE A PICTURE OF YOUR HANDWRITING TO ATTACH YOUR ANSWER.Assume a technological advance lead to lower production costs. Show the effect this will have on national income, unemployment, inflation, and interest rates with the help of an AD-AS diagram, assuming classical model. DRAW FULL LABELED DIAGRAM ON A PAPER, EXPLAIN AS ASKED IN THE QUESTION, THEN TAKE A PICTURE OF YOUR HANDWRITING TO ATTACH YOUR ANSWER.6) Consider the following IS-LM model: C = 200+ 0.25YD I = 150+ 0.25Y -1000i G = 250 T = 200 M = 2Y - 8,000i M = 1,600 P a. Derive the IS relation. b. Derive the LM relation. c. Solve for the equilibrium real output. d. Solve for the equilibrium interest rate. e. Solve for the equilibrium values of C and I and verify the value you obtained for Y by adding up C, I, and G. M 1,840 f. Now suppose that the money supply increases to P Solve for Y, i, C, and I, and describe in words the effects of an expansionary monetary policy. M P g. Set equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and C.
