Draw fully labelled graphs to get full credits. (a) Use the financial market diagram to derive...

Draw fully labelled graphs to get full credits.

(a) Use the financial market diagram to derive the LM curve when there is an interest rate target. Explain.

(b) What is the slope and intercept of the LM curve when there is an interest rate target?

(c) When is a fiscal policy more effective at changing the level of output: when the central bank maintains a fixed real money supply or when the central bank sets an interest rate target? Draw the IS-LM model and explain.

Expert Solution

LM curve explains various combination of income interest rate when demand for money is equal to money supply ( money market equilibrium ). Demand for money ( Md) is a function of income and interest rate and supply of money(Ms) is fixed. M1= Transactionary motive and precautionary motive , that is a function of income,M2= speculative motive ,So total demand for money = M1+M2. Let us draw four panel diagram to derive LM curve. First diagram shows negative relation between speculative demand for money and rate of interest. At r1, rate of interest M21 speculative demand for money and at r2 , there is M21. Second diagram shows relationship between M1 ad M2 . Third diagram shows positive relationship between M1 demand for money and income level. In fourth diagram we can derive LM curve by joining the two points A and B that shows the relationship between rate of interest and income level b. Slope of LM ,when the central bank has a interest rate target , Y =1/K ( M+hi) , Slope of LM is determined by K and h , K = income sensitivity of demand for money and h is interest sensitivity of demand for money. Larger the income sensitivity of Md or smaller the interest sensitivity of Md , steeper the LM curve will be. c. Fiscal policy is more effective when central bank has a fixed money supply and interest rate target when LM curve is horizontal and IS curve is elastic. So even the government increases its spending, there will be no crowding out effect due to fixed interest rate and money supply and fiscal policy has maximum effect on national income

Rahul Sunny answered 2 years ago

Draw fully labelled graphs to get full credits. (a) Write out the IS relation and the...

Draw fully labelled graphs to get full credits. (a) Write out the IS relation and the LM relation (use the real money demand equals the real money supply). (6 points) (b) Suppose now the central bank increases the money supply. What open market operations will central bank exercise in this case? Draw the financial market diagram to show the effect on the interest rate for a given real output Y. (6 points) (c) Using your answer for (b), draw the...

Draw fully labeled graphs. (a) Use the financial market diagram to derive the LM curve when...

Draw fully labeled graphs. (a) Use the financial market diagram to derive the LM curve when there is an interest rate target. Explain. (b) What is the slope and intercept of the LM curve when there is an interest rate target? (c) When is fiscal policy more effective at changing the level of output: when the central bank maintains a fixed real money supply or when the central bank sets an interest rate target? Draw the IS-LM model and explain.

Draw fully labeled graphs to get full credits. (a) Write out theIS relation and the...

Draw fully labeled graphs to get full credits. (a) Write out the IS relation and the LM relation (use the real money demand equals to real money supply).(b) Suppose now the central bank increases money supply. What open market operations will central bank exercise in this case? Draw the financial market diagram to show the effect on interest rate for a given real output Y.(c) Using your answer for (b), draw the IS-LM model to show the effects on interest...

1.1 With the aid of a full y labelled diagram, draw a Production Possibility Frontier for...

1.1 With the aid of a full y labelled diagram, draw a Production Possibility Frontier for an economy producing maize and fish. Use the diagram to explain the concepts of choice, scarcity and opportunity costs 1.2 With the aid of a separate diagram explain what would happen if the African armyworm destroyed the maize production in the economy of 1.1 ceteris paribus 1.3 With reference to the diagram in 1.1, distinguish between 'efficiency' and' inefficiency'

3. Draw fully labeled graphs. (a) Write out the IS relation and the LM relation (use...

3. Draw fully labeled graphs. (a) Write out the IS relation and the LM relation (use the real money demand equals to real money supply). (b) Suppose now the central bank increases money supply. What open market operations will central bank exercise in this case? Draw the financial market diagram to show the effect on interest rate for a given real output Y. (c) Using your answer for (b), draw the IS-LM model to show the effects on interest rate...

(C) Use well-labelled diagram(s) to analyze the effect of the following cases on the market for...

(C) Use well-labelled diagram(s) to analyze the effect of the following cases on the market for apples. (i) A fall in the price of pears. (ii) Farmers use a new fertilizer that makes apple trees more productive.

Identify and explain the externality associated with the consumption of cigarettes? b) Draw a fully labelled...

Identify and explain the externality associated with the consumption of cigarettes? b) Draw a fully labelled diagram illustrating how the externality identified in part (a) above can be corrected from society’s point of view. c) The Australian government is considering running advertising campaigns to stop or a least slow down the purchase of cigarettes. What is the opportunity cost for the Australian Government if it chooses to do this? How does rational decision making help a government decide how much...

1.On a fully labelled AD/AS diagram, which shows that the economy is experiencing an inflationary gap,...

1.On a fully labelled AD/AS diagram, which shows that the economy is experiencing an inflationary gap, demonstrate what would happen if interest rates increase. Was the policy successful? 2.On a fully labelled AD/AS diagram, which shows that the economy is experiencing a recessionary gap, demonstrate what would happen if a new technology is introduced that makes workers more efficient.

Draw a labelled diagram of a field effect transistor and explain how the properties change as...

Draw a labelled diagram of a field effect transistor and explain how the properties change as a forward bias and a reverse bias are applied.

What is homeostasis ? Draw a simple labelled diagram and briefly explain what are the components...

What is homeostasis ? Draw a simple labelled diagram and briefly explain what are the components required in a generic homeostatic system? N.B. You may draw this diagram by hand or draw directly on the computer. Please do not copy-paste images from the web or textbooks. A rough sketch is satisfactory; does not necessarily need to be coloured or of printable quality.

Question