Describe how, if at all, each of the following developments affects the IS and/or MP curves,...
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Describe how, if at all, each of the following developments affects the IS and/or MP curves, and equilibrium output and the real interest rate. Your answer to each part should include an IS-MP diagram. (a) The central bank changes its monetary policy rule so that it sets a lower level of the real interest rate at a given level of output than before. (b) The central bank changes its policy rule to be more aggressive in responding to changes in output. Specifically, it decides that it will increase the real interest rate by more than before if output rises, and cut it by more than before if output falls. (c) Government purchases rise, and at the same time the central bank changes its policy rule to set a lower real interest rate at a given level of output than before. (d) Government spending follows an automatic stabilizer rule, such that G falls when Y rises and G rises when Y falls. (Hint: how does this affect the planned expenditure?) Let's consider a simple way to think about inequality in an IS-MP Model. Suppose that all taxes are zero and government spending is also 0. There are two kinds of agents, rich and poor. There is a total of L individuals in the economy. On all other details, the model is identical to the one in the slides. Assume that • rich agents are the top 50% of all agents in the economy and earn a share OR > 0.5 of all income in the economy. Their MPC is C1R. ● poor agents are the bottom 50% of all agents in the economy and earn a share Op = 1 - 0R of all income in the economy. Their MPC is C₁p > C1R. (e) Explain why the assumption C₁p > C₁R is reasonable. (f) Derive the IS curve for this economy. How does its slope depend on the extent of inequality as measured by R, and on CIP, CIR? (g) Suppose the LM curve for this economy is given by r r = shock. Plot the IS and LM curves. Pπ + € where e is a monetary policy Describe how, if at all, each of the following developments affects the IS and/or MP curves, and equilibrium output and the real interest rate. Your answer to each part should include an IS-MP diagram. (a) The central bank changes its monetary policy rule so that it sets a lower level of the real interest rate at a given level of output than before. (b) The central bank changes its policy rule to be more aggressive in responding to changes in output. Specifically, it decides that it will increase the real interest rate by more than before if output rises, and cut it by more than before if output falls. (c) Government purchases rise, and at the same time the central bank changes its policy rule to set a lower real interest rate at a given level of output than before. (d) Government spending follows an automatic stabilizer rule, such that G falls when Y rises and G rises when Y falls. (Hint: how does this affect the planned expenditure?) Let's consider a simple way to think about inequality in an IS-MP Model. Suppose that all taxes are zero and government spending is also 0. There are two kinds of agents, rich and poor. There is a total of L individuals in the economy. On all other details, the model is identical to the one in the slides. Assume that • rich agents are the top 50% of all agents in the economy and earn a share OR > 0.5 of all income in the economy. Their MPC is C1R. ● poor agents are the bottom 50% of all agents in the economy and earn a share Op = 1 - 0R of all income in the economy. Their MPC is C₁p > C1R. (e) Explain why the assumption C₁p > C₁R is reasonable. (f) Derive the IS curve for this economy. How does its slope depend on the extent of inequality as measured by R, and on CIP, CIR? (g) Suppose the LM curve for this economy is given by r r = shock. Plot the IS and LM curves. Pπ + € where e is a monetary policy
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a Central Bank Changes Monetary Policy Rule Effect on IS Curve With a lower level of real interest rates for a given level of output investment becomes cheaper leading to an increase in investment and ... View the full answer
Related Book For
Introduction To Statistical Investigations
ISBN: 9781118172148
1st Edition
Authors: Beth L.Chance, George W.Cobb, Allan J.Rossman Nathan Tintle, Todd Swanson Soma Roy
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