C = 100 + 0.5 - (Y – T) I= 200 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 300, T = 200. The LM (money market equilibrium) curve is P 101 where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is z“ = 0.02. Assume that the long-run equilibrium level of output is Ÿ = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r 1. Suppose the government (not the CB) wants to stabilise the shock in the long-run, meaning it wants the real interest rate to be the same as before the shock. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Suppose the government follows the policy you prescribed above. Explain how the economy would shift from its short-run to long-run equilibrium. In particular, what happens to output Y, the real interest rate r, and prices P during this process?

Suppose the money demand function is Md/P = 1000+ 0.2Y - 1000 (r + π²). and Y = 2000, r = .06, π = .04, and Ms is 2600. Suppose the real interest rate rises to 0.11, and expected inflation rises to 0.09, but Y and Ms are unchanged. What would the inflation rate be? Select one: a. 4% b. 10% O c. 6% d. 8%

D7) IS-LM Model: Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a monetary expansion will have on output, the interest rate, and investment. ( Properly)

Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is Įd = 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are re = 0.05, G= 200, Y = 1000, and M= 2100. b. Suppose the money supply increases to 2800. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.)

Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?

7) Assume that the economy is initially operating at the natural level of output. A simultaneous expansionary monetary policy and an increase in oil prices will cause which of the following? A) an increase in output and a reduction in the interest rate in the short run B) a reduction in output and an increase in the interest rate in the short run C) a reduction in output and a reduction in the interest rate in the short run D) an ambiguous effect in output and an increase in the price level in the short run E) an ambiguous effect in output and a reduction in the price level in the short run

Consider an economy characterised by: C = 500+ 0.8(Y-T) I = 400 120r +0.1Y G=300 T = 0.25Y L(r, Y) = Y - 300r M/P=600 13 where C, Y, I, G, T, r, L and M/P, denote consumption, output, investment, government spending, taxes, the interest rate, liquidity preferences and the real money supply, respectively. • Derive expressions for the IS and the LM schedules and plot the two curves. . Find the equilibrium interest rate and the equilibrium level of income. Derive the Keynesian multiplier and comment its properties compared to the standard case. . Calculate and interpret the effects on Y and r of an increase of money supply that bring M/P to 1200.

C = 100 + 0.5 - (Y – T') I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť = 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. Question 5 Suppose that consumers finally decide to get rid of cash altogether, and only use debit cards. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand?

C = 100 + 0.5 - (Y –T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Ť= 100. The LM (money market equilibrium) curve is M Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is xª = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to “ = 0.05. 3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and what happens to short-run output Y and the real interest rate r if this policy is followed. 4. Suppose the CB…

Higher potential output levels without any monetary policy intervention will lead to   Multiple Choice   higher real interest rates.   lower real interest rates and higher inflation rates.   lower real interest rates and lower inflation rates.   higher real interest rates and lower inflation rates.