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    A4Econ 1101 PDF

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    This document contains an economics assignment with 4 questions regarding macroeconomic models and policy. Question 1 asks to graphically derive and explain the IS and LM curves, and how monetary policy shifts each curve. Question 2 asks about the policy mix and why it is used. Question 3 asks about using fiscal and monetary policy in opposite directions. Question 4 provides a numerical example and asks to solve for equilibrium values and effects of monetary and fiscal policy shifts.

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    A4Econ 1101 PDF

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    Anonymous 2yKyW3B2
    70 views2 pages
    This document contains an economics assignment with 4 questions regarding macroeconomic models and policy. Question 1 asks to graphically derive and explain the IS and LM curves, and how monetary policy shifts each curve. Question 2 asks about the policy mix and why it is used. Question 3 asks about using fiscal and monetary policy in opposite directions. Question 4 provides a numerical example and asks to solve for equilibrium values and effects of monetary and fiscal policy shifts.

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    This document contains an economics assignment with 4 questions regarding macroeconomic models and policy. Question 1 asks to graphically derive and explain the IS and LM curves, and how monetary policy shifts each curve. Question 2 asks about the policy mix and why it is used. Question 3 asks about using fiscal and monetary policy in opposite directions. Question 4 provides a numerical example and asks to solve for equilibrium values and effects of monetary and fiscal policy shifts.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    70 views2 pages

    A4Econ 1101 PDF

    Uploaded by

    Anonymous 2yKyW3B2
    This document contains an economics assignment with 4 questions regarding macroeconomic models and policy. Question 1 asks to graphically derive and explain the IS and LM curves, and how monetary policy shifts each curve. Question 2 asks about the policy mix and why it is used. Question 3 asks about using fiscal and monetary policy in opposite directions. Question 4 provides a numerical example and asks to solve for equilibrium values and effects of monetary and fiscal policy shifts.

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    of 2

    ECON 1101 Macroeconomics

    Assignment IV
    Due: 3/26/2019

    Instructions:

    - Please type in your answers to questions. You can use a separate sheet for the graphical
    illustrations.

    Q1[40 points] Briefly, but not unsatisfactorily, answer the following questions.

    a) Using the Keynesian cross model where the goods market equilibrium is determined
    and analyzed, graphically derive the IS curve, and explain each step. Explain what the
    equilibrium in the goods market implies for the IS curve, i.e., why is the IS curve
    downward sloping. Also, explain what causes shifts in the IS curve.

    b) First, based on the analysis of the financial market equilibrium, graphically derive the
    LM curve. Explain what the LM curve is and explain in detail why it has its particular
    shape. Explain what causes shifts in the LM curve.

    c) Suppose that the FED sells a large amount of bonds (say, treasury securities) through
    open market operations. Graphically illustrate and explain in detail what effect this
    operation will have on the LM curve and the IS curve. Also explain if it cause a shift in
    the IS and LM curve?

    d) Suppose that the US government reduces government spending (G) to reduce the
    budget deficit (G-T>0). Graphically illustrate and explain in detail what effect this
    policy will have on the LM curve and the IS curve. Also explain if it cause a shift in the
    IS and LM curve?

    Q2[20 points] What is the policy mix? Explain why governments and centrals banks use
    a policy mix when either one on its own could achieve the desired increase in output. Is it
    true that sometimes, the right mix is to use fiscal and monetary policy in the same
    direction? Explain in detail with an example and graphical illustration (suppose there
    is a simultaneous increase in government spending and increase in the money supply).

    Q3[20 points] Is it also true that sometimes, the right policy mix is instead to use the
    policies in opposite directions, for example, combining a fiscal consolidation with a
    monetary expansion? Explain in detail with an example (combining a fiscal
    consolidation with a monetary expansion) and graphical illustration.

    1
    Q4[60 points] Consider the following numerical example of the IS-LM model:

    C = 100 + 0.75YD
    I = 225 + 0.15Y - 600i
    G = 450
    T = 100

    a. Derive the IS relation.


    b. The central bank sets an interest rate of 75% (i = 0.75). How is that decision
    represented in the equations?
    c. What is the level of real money supply when the interest rate is 75%? Use the
    expression:
    𝑀
    = 3𝑌 − 9900𝑖
    𝑃

    d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by
    adding C, I, and G.

    e. Now suppose that the central bank cuts the interest rate to 5% (i=0.05). How does this
    change the LM curve? Solve for Y, I, and C, and describe in words the effects of an
    expansionary monetary policy. What is the new equilibrium value of M/P supply?

    f. Return to the initial situation in which the interest rate set by the central bank is 75%.
    Now suppose that government spending increases to G = 600. Summarize the effects of
    an expansionary fiscal policy on Y, I, and C. What is the effect of the expansionary fiscal
    policy on the real money supply?

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