a) Using the Keynesian cross model where the goods market equilibrium is determined and analyzed, graphically derive the IS curve, and explain each step. Explain what the equilibrium in the goods market implies for the IS curve, i.e., why is the IS curve downward sloping. Also, explain what causes shifts in the IS curve

b) First, based on the analysis of the financial market equilibrium, graphically derive the LM curve. Explain what the LM curve is and explain in detail why it has its particular shape. Explain what causes shifts in the LM curve.

c) Suppose that the FED sells a large number of bonds (say, treasury securities) through open market operations. Graphically illustrate and explain in detail what effect this operation will have on the LM curve and the IS curve. Also, explain if it causes a shift in the IS and LM curve?

d) Suppose that the US government reduces government spending (G) to reduce the budget deficit (G-T>0). Graphically illustrate and explain in detail what effect this policy will have on the LM curve and the IS curve. Also, explain if it causes a shift in the IS and LM curve?

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a Deriving the IS Curve 1 Goods Market Equilibrium In the Keynesian cross model goods market equilibrium is determined by the equality of aggregate expenditure AE and aggregate output Y AE is composed ... View the full answer