13. Let's assume that consumption depends on disposable income, and investment depends on the interest rate and output. Government spending is exogenously determined. Consider that there is an open market sale of bonds by the central bank. a. In an IS-LM diagram, show the effect of the open market sale of bonds on output and the interest rate. Explain clearly what causes the curve(s) to shift. b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables. c. Suppose the federal government wants to maintain output at the initial level. What must the federal government do in response to the central bank's sale of bonds to restore output? Show the effect on output and the interest rate using the IS-LM diagram. What effect will this policy have on private saving?

13. Let's assume that consumption depends on disposable income, and investment depends on the interest rate and output. Government spending is exogenously determined. Consider that there is an open market sale of bonds by the central bank. a. In an IS-LM diagram, show the effect of the open market sale of bonds on output and the interest rate. Explain clearly what causes the curve(s) to shift. b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables. c. Suppose the federal government wants to maintain output at the initial level. What must the federal government do in response to the central bank's sale of bonds to restore output? Show the effect on output and the interest rate using the IS-LM diagram. What effect will this policy have on private saving?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter20: Exchange Rates And The Macroeconomy

Section: Chapter Questions

Problem 3TY

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