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 and output. What happens to the components of demand (C and I)? Explain why.

(d) Now suppose in addition to the expansionary monetary policy, the government want to reduce budget deficit at the same time. Draw the effects of these two policies together in one IS-LM graph. What happens to equilibrium interest rate? Output?

Expert Solution

Rahul Sunny answered 1 year ago

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