3. Using the IS-LM graphs, show that a decrease in government spending will cause output and...

3. Using the IS-LM graphs, show that a decrease in government spending will cause output and interest rates to fall.

4. Using the IS-LM graphs, show what will happen to output and the interest rates if there is a balanced budget increase in spending—that is higher spending financed by higher taxes.

5. Using IS-LM graphs, predict what will happen to output and the interest rate if the central bank reduces the money supply.

Expert Solution

In each graph, IS0 and LM0 are initial IS and LM curves intersecting at point A with initial interest rate r0 and output Y0.

(3) A fall in government spending will decrease aggregate demand and output, shifting IS curve leftward, lowering both interest rate and output. In following graph, IS0 shifts left to IS1, intersecting LM0 at point B with lower interest rate r1 and lower output Y1.

(4) Since government spending multiplier is higher than tax multiplier, an equal increase in government spending and tax will effectively increase aggregate demand and output, shifting IS curve rightward, increasing both interest rate and output. In following graph, IS0 shifts right to IS1, intersecting LM0 at point B with higher interest rate r1 and higher output Y1.

(5) Decrease in supply money will shift money supply curve leftward, increasing interest rate and decreasing quantity of money. As a result, LM curve will shift leftward, increasing interest rate and decreasing output. In following graph, LM0 shifts left to LM1, intersecting IS0 at point B with higher interest rate r1 and lower output Y1.

Rahul Sunny answered 2 years ago

A decrease in government spending will, in the long-run, cause no change in A. output. B....

A decrease in government spending will, in the long-run, cause no change in A. output. B. the real interest rate. C. the price level. D. all of the above. E. both (a) and (b) of the above. Use the AD-AS framework and suppose the economy is in equilibrium at the full-employment level of output. If the Federal Reserve increases the money supply, the long-run final effect would be: A. an increase in output. B. a decrease in the real interest...

Use the classical IS-LM model to show the effects of a temporary decrease in government purchases...

Use the classical IS-LM model to show the effects of a temporary decrease in government purchases on the equilibrium levels of output, the real interest rate, employment, the real wage, and the price level.

By how much would the government spending need to increase to prevent the $300mil decrease in output?

Imagine that the US economy suddenly falls into the recession and the GDP is forecasted to decrease by $300mil. We know that the propensity to consume (c1) is 0.6. The government wants to fight the recession and it is considering either a massive spending boost or a new tax reformQuestion: By how much would the government spending need to increase to prevent the $300mil decrease in output?(Report your answer in millions. For example, if your answer is $550mil, write down...

In a binding situation, a decrease in government spending

In a binding situation, a decrease in government spending Select one: a. does not shift the ADcurve. b. causes the ADcurve to become horizontal. c. shifts the ADcurve to the right. d. shifts the AD curve to the left. An increase in government purchases shifts the _______ curve to the _______ Select one: a. aggregate supply; right b. aggregate supply; left c. aggregate demand, left d. aggregate demand; right Which of the following is an example of an expansionary fiscal policy? Select one: a. the federal government increasing the amount of money spent on...

Derive the AD relation using IS-LM graphs.

Using the IS-LM model, show and explain how a decrease in taxes affects the interest rate...

Using the IS-LM model, show and explain how a decrease in taxes affects the interest rate and output.

On an IS‐LM diagram, show the effects of a decrease in money demand. a. If the...

On an IS‐LM diagram, show the effects of a decrease in money demand. a. If the government did not intervene, what would happen to output and the interest rate in the short run? What would happen in the long run? b. If the government did intervene, using monetary policy to stabilize output, would the Fed use expansionary or contractionary monetary policy? How would you show that on the graph?

Suppose the federal government unexpectedly decreases its spending. Using the IS-LM model, explain how this contractionary...

Suppose the federal government unexpectedly decreases its spending. Using the IS-LM model, explain how this contractionary fiscal policy affects the real interest rate, r, and total output, Y , in both the short run and the long run. What happens to consumption, C, investment, I, and government expenditure, G, in the short-run? What happens to C, I, G, and r in the long- run? (Note: For full credit, you must provide a brief explanation for why each variable changes or...

Using AD/AS model, explain and show using graphs how fiscal policy overshooting can cause consequences in...

Using AD/AS model, explain and show using graphs how fiscal policy overshooting can cause consequences in the economy.

1)In the IS–LM model, the impact of a decrease in government purchases in the goods market...

1)In the IS–LM model, the impact of a decrease in government purchases in the goods market has ramifications in the money market, because the decrease in income causes a(n) ______ in money ______. A) Increase; supply; B) Increase; demand; C) Decrease; supply; D) Decrease; demand. 2)If the IS curve is given by r = 18 – .01Y and the LM curve is given by r = -4 + .01Y, if the full employment level of output is 1,200, then in...

Question