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Use the IS-LM model to answer this question and assume that the central bank controls the interest rate. Suppose there is a simultaneous decrease in taxes and increase in interest rate.
a. Explain what effect this particular policy mix will have on output and the money supply.
b. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
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- According to the IS-LM model, a. what happens to the interest rate, income, and investment when government spending decreases? b. how the Fed should adjust the money supply to keep income at its initial level. What happens to the interest rate as a result? c. If the Fed's goal is instead to hold the interest rate constant, explain in words how the Fed should adjust the money supply when government spending decreases. What happens to income as a result? d. What is the Fed's dilemma?Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000i G = 250 T = 200 i = .05 (i has a bar over it) a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i 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 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary 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 5%. Now suppose that government spending increases to G = 400. Summarize the…
- Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in taxes and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000iG = 250 T = 200 i = .05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i 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 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary 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 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph (hand-drawn). Also, make sure to include a very short qualitative analysis of the policies, showing the chain effects of the variables discussed. Do not overwrite!a. The central bank decreases the money supply - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)b. A housing market crash that reduces consumer wealth - Short-run and Long-run effects (transition from SR to LR) of this shock (Use AD-AS plus IS-LM model for this part)c. The government increases taxes - Short-run and Long-run effects (transition from SR to LR) of this policy (Use AD-AS plus IS-LM model for this part)d. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems - Short-run and Long-run effects…
- Using the IS LM model, show how expansionary monetary and expansionary fiscal have same effect on output but opposite impact on interest rates. b. Derive the equations for IS and LM curves from the set of equations given below: C = 80+ 0.75Yd I = 300-200 i G is government expenditure G = 30 T = 30 where T= taxes Ms = 270 where Ms is money supply Md = 150+ 0.30Y – 300i Find the volume of investment at equilibrium . What would be the impact on investment if Money supply is increased to 300.Consider the monetary intertemporal model. Payments can be made with either credit cards or with money, and we denote the amount of transactions in real terms with credit cards as X. The bank is willing to supply credit card services as a function of Xs(q) where q is the cost per unit of credit. The money supply is given by Ms and the goods market and the labour market are as we described in the real intertemporal model Assume that the government introduces a tax on credit card services. That is, if a consumer or a firm holds a credit card balance of X, they are taxed tX where t is the tax rate. Determine the effects on the equilibriums price and the quantity of credit card services, the demand for money, and the price levelFiscal and Monetary Stimulus A. Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results. B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium? C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy? D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?
- In the IS-LM model, the consequence of an increase in interest rates is: (A) Investment and Aggregate Demand rise, shifting the IS curve to the right. B Money demand decreases, shifting the LM curve down. Money demand decreases, and, as money supply is given, the LM curve shifts up. Investment and Income decrease, moving along the IS curve.Urgentttt!!! Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Question Four Assume the following IS-LM model: Expenditure Sector AD = C + I + GC = 130+ (4/5) YD YD = Y-TT = 100+1/4Y1 = 300-20i G = 150 Where, Ms = Real Money Supply Md Real Money Demand C = Consumption T = Taxes | = Investment G = Government Purchases (a) (b) Derive equations for the IS and LM Schedules. Money Sector Ms = 350 Md = (1/3)Y+200-10i What are the equilibrium levels of income and the interest rate? (c) (d) (e) (f) Use your answers in part (b) above to determine the equilibrium values of Consumption and Investment. Is the goods market in equilibrium? Explain. Suppose the government increases its expenditures by GH¢200 million. i. How much and in what direction will the IS curve shift? ii. iii. Write down the equations that describe the new IS curve. What are the new equilibrium interest rate r1* and the equilibrium level of income y1*? How would your answer in part (d) above change if the relevant investment function is i = 340-40i? Using your answers to parts (d) and (e)…