Use an open-economy ISLM framework to graph and explain the overall effect of expansionary fiscal policy on y and r in an economy characterized by a relatively interest-sensitive money demand function. Also consider the impact of this policy on the distribution of output among spending sectors.
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- Explain and illustrate the following: a) Construct one IS-LM model and illustrate using arrows the effects of the following on Y and I when: Government increases government spending, other factors constant. Show the crowding out effect.b) Construct one IS-LM model and illustrate using arrows the effects of the following on Y and I when: Central Bank conducts an open market purchase of government bonds. Describe the transmission mechanism of monetary policy.c. Use the loanable funds market to illustrate graphically how an increase in net capital outflow will affect domestic interest rates and investment. Briefly explain your illustration.Assume that an economy is experiencing simultaneous equilibrium in both the product market and money market. Furthermore, assume the MPC is currently around a normal level of 0.65 and the sensitivity of real money demand to also around a normal level. What is meant by the term crowding out? In your answer also explain the implications of crowding out for the macroeconomy.An economy is initially described by the following equations: C - 60 + 0.8(Y-T) I- 120-Sr MIP - Y-25, G= 200 т- 200 M - 3000 P- 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new cquilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r: new cquilibrium Y: tax multiplier:
- Suppose in our two-period model of the economy that the government, instead of borrowing in the current period, runs a government loan program. That is, loans are made to consumers at the market real interest rate r, with the aggregate quantity of loans made in the current period denoted by L. Government loans are financed by lump-sum taxes on consumers in the current period, and we assume that government spending is zero in the current and future periods. In the future period, when the government loans are repaid by consumers, the government rebates this amount as lump-sum transfers (negative taxes) to consumers. We use the same notation as in the lecture notes (y, y′ , c, c′ ,t, t′ , s, T, T′ ). Also, we use l ≡ L/n to represent the size of the loan that each individual consumer takes from the loan program, where n is the population. 1) Write down the government’s current-period budget constraint and its future-period budget constraint. 2) Determine the present-value budget…Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T)I = 1000 - 300?G = 1000T = 1200MD = 0.5Y - 200rM = 5000P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer. (e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written…The Covid-19 pandemic has forced many countries to partially shutdown their economies to prevent the spread of the virus. In response, many governments have embarked on expansionary fiscal policy. Government Fiscal and Monetary Policy can coordinate to achieve specific economic goals. Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Government wants to hold output constant. Please explain your answer.
- Which of the following sequence of events occurs in response to an expansionary fiscalpolicy?a) Aggregate output decreases, causing money demand to decrease, causing the interestrate to decrease and planned investment to increase.b) Aggregate output decreases, causing money demand to increase, causing interest ratesto increase and planned investment to decrease.c) Aggregate output increases, causing money demand to increase, causing interest ratesto increase and planned investment to decrease.d) Aggregate output decreases, causing the demand for money to increase, causinginterest rates to increase and planned investment to increase.The Covid-19 pandemic has forced many countries to partially shutdown their economies to prevent the spread of the virus. In response, many governments including Jamaica have embarked on expansionary fiscal policy. Government Fiscal and Monetary Policy can coordinate to achieve specific economic goals. (a) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Bank of Jamaica want to hold the money supply constant. Please explain your answer. (b) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume instead, the Bank of Jamaica want to hold interest rate constant. Please explain your answer. (c) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Government wants to hold output constant. Please explain your answer.“Expansionary fiscal policy is more effective in influencing the aggregate income level when investment is interest-elastic”. Do you agree with this statement? Why and why not? Explain your answer based on the IS-LM framework.
- Use the IS-LM model to answer this question. Suppose that the government wants to lower the budget deficit but keep output constant. Discuss what mix of monetary and fiscal policy will achieve this goal. Provide your line of reasoning and justify the answer. Attach an appropriate graph to support your answer.The Covid-19 pandemic has forced many countries to partially shutdown their economies to prevent the spread of the virus. In response, many governments including Jamaica have embarked on expansionary fiscal policy. Government Fiscal and Monetary Policy can coordinate to achieve specific economic goals. (a) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Bank of Jamaica want to hold the money supply constant. Please explain your answer. (b) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume instead, the Bank of Jamaica want to hold interest rate constant. Please explain your answer. (c) Use a carefully labeled diagram consisting of an IS curve and the LM curve to illustrate the effect of an expansionary fiscal policy. Assume the Government wants to hold output constant. Please explain your answer.Using the IS-LM model (including the Money Market diagram), show the full effect of a con- tractionary fiscal policy (e.g. AG < 0) on the economy. Compare the new equilibrium to the initial equilibrium, commenting on output Y, the interest rate r.