Which of the following statements is consistent with a given (i.e., fixed) LM curve? Select one: a. A reduction in the interest rate causes money demand to decrease. b. A reduction in the interest rate causes investment spending to increase. c. An increase in output causes an increase in demand for goods d. An increase in output causes an increase in money demand.
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- COURSE: MACROECONOMICS - IS-LM MODEL Comment on the following statements:1.- Changes in government spending will have a greater effect on output when the demand for money is very sensitive to changes in the level of output. Graph 2.- Demonstrate under the assumptions of the IS-LM model the effect of having a consumption function with an exogenous component, an income-dependent part and a part that depends on the interest rate. GraphExercise 11.11 Optional: Suppose the central bank's monetary policy sets the interest rate accord- ing to the function: i = 3.0+2.0(T – T*) with a* = 4.0, and aggregate expenditure is the sum of: C= 200+0.75Y I = 85 – 2i G= 100 X – IM = 50 -0.15Y-3i (a) What is the equation for the ADA curve? (b) Plot the ADn curve in a diagram, not necessarily to scale, that shows the horizontal intercept and slope of the curve.Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD₁ and AD₂. You can see the slopes of AD₁ and AD₂ by selecting them on the graph.
- 2. Suppose, C=0.8(1-t)Y • t=0.25 •| = 900 – 50i • G=800 a) What is the equation for lIS curve b) What is the effect of increase in govt. expenditure by 100 on the IS equation & IS curve? Show the effect using graphs c)What will happen to the slope of IS curve if Investment becomes more sensitive to interest, say | = 900 – 60i ?2. In the IS-LM model, what is the effect of an increase in government purchases? Draw an IS-LM diagram to illustrate. In this question, it is not necessary to include the FE line. a) What is the effect on output and the real interest rate? b) What is the effect on investment spending? c) If the LM curve had been horizontal, explain how your answers to a and b would have been different.The figure below shows a simple macroeconomic consumption model. The letters N and D indicate curves, the letters T, A, L and Q denote (intersection) points. The "auxiliary triangles" marked in burgundy mean that if the value of the horizontal section shown in them is considered to be 1, the value of the vertical sections is s and r, respectively. It is known that L is 100 and ris 0.75. T 45° A 1 Give the equation of the savings function: S= (use a decimal point and 2 decimals if needed, and write capital letters as an unknown variable) How much is the value of A on the X axis?
- 1. How do changes in the real interest rate affect the IBL and current and future consumption? 2. How do binding borrowing constraints affect the IBL and current and future consumption? 3. On what assumptions did Keynes base his theory of consumption? How does his theory relate to intertemporal choice?Which statement best describes the investment savings schedule in the IS/LM model? Oa. The investment savings curve represents the locus of combinations of the interest rate and output which satisfy equilibrium in the goods market. Ob. The investment savings curve represents the locus of combinations of the interest rate and output which satisfy equilibrium in the money market. Oc The investment savings curve represents the locus of combinations of the price level and output which satisfy equilibrium in the money market. Od. The investment savings curve represents the locus of combinations of the price level and output which satisfy equilibrium in the goods market. Oe The investment savings curve represents the locus of combinations of the interest rate and the price level which satisfy equilibrium in the goods market.COURSE: MACROECONOMICS - IS-LM and/or MUNDELL FLEMING MODELS Refer to 2 different models (and/or conditions) under which an increase in the amount of money circulating in the economy has a NULL impact on GDP. Then, refer to 2 different models (and/or conditions) under which an increase in the amount of money circulating in the economy has a MAXIMUM impact on GDP. EXPLAIN very briefly the mechanism by which each model generates that NULL or MAXIMUM impact on GDP. Hint: 2 conditions under increase of M (money) and how impact null (zero) and maximum on GDP. Example, considering both fiscal or monetary policies or liquidity trap model. Please graph and explain on detail both cases.
- 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…5:45 PM A 5 P NO fill 1.5 42 K ECF515-D-1-2021-1.docx SESSION A: CHOOSE THE BEST ANSWER 1. The IS curve represents A. the single level of output where the goods market is in equilibrium. B. the single level of output where financial markets are in equilibrium. C. the combinations of output and the interest rate where the money market is in equilibriu m D. the combinations of output and the interest rate where the goods market is in equilibriu m. 2. The IS curve will shift to the right when which of the following occurs? A. an increase in the money supply B. an increase in government spending C. a reduction in the interest rate D all of the above. 3. Which of the following occurs as the economy moves leftward along a given IS curve? A. an increase in the interest rate causes investment spending to decrease B. an increase in the interest rate causes money demand to increase C. an increase in the interest rate causes a reduction in the money supply D. a reduction in government spending…19. Which of the following statements concerning Keynesian analysis are true? Select one: a. Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of three types of spending: consumer expenditure, planned investment spending, and government spending. Ob. Keynes recognized that equilibrium would occur in the economy when planned expenditure equals Actual expenditure O c All of the above are true. d. Keynes's analysis involves explaining why aggregate output is at a certain level by understanding what factors affect each component of aggregate demand and how the sum of these components could add up to an output smaller or greater than the economy is capable of producing