Using IS – LM curves, show graphically what will happen to output (Y) and interest rates (r) if:

Using IS – LM curves, show graphically what will happen to output (Y) and interest rates (r) if:.

IS – LM curves

Using IS – LM curves, show graphically what will happen to output (Y) and interest rates (r) if:

  1.  FED increases money supply and Congress cuts spending.
  2.  Both government spending and the money supply increase.
  3.  The FED cuts the money supply and taxes are increased.
  4. Verify that equilibrium output will be 800 (Y = 800) and the interest rate 5 percent (r = 5).
  5. Suppose government spending increases by 65 (from 200 to 265) financed by running a budget deficit. What will happen to output and the interest rate?
  6. Suppose the government raises taxes by 65. What happens to output and the interest rate? 11. Supposegovernmentspendingincreasesby65financedbyataxincreaseof65.Whathappenstooutput

and the interest rate?

  1. Suppose the money supply increases by 65 (from 130 to 195). What happens to output and the interest rate?
  2. Suppose government spending increases by 65 and this is financed by an equal increase in the money supply. What happens to output and the interest rate?

 

Chapter 5

  1.  Suppose investment is not very sensitive to interest rates.  Would you rather use fiscal or monetary policy to stimulate an economy that is in a recession.  Explain in pictures and words.
  2.  Suppose that money demand is extremely sensitive to interest rates.  Would you use fiscal or monetary policy to stimulate an increase in GDP?  Explain in words and pictures.
  3.  What is meant by quantitative easing?  When would the FED use it?  Explain what it is meant to do and how it would work.
  4.  What does the LM curve look like in the liquidity trap?  How effective is monetary policy?  Fiscal policy?

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Using IS – LM curves, show graphically what will happen to output (Y) and interest rates (r) if:

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