Use the IS-LM model and create an enlarged version of Figure 1 to answer the following...

  

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Use the IS-LM model and create an enlarged version of Figure 1 to answer the following question. Suppose in period 0 that the United States is initially at full employment. The central bank operates a fixed exchange rate regime pegged to E. Then, in period 1 there is a temporary increase in government spending that lasts for one period. (a) (5 pts.) Label the initial curves as (ISo, LM, UIPo). Indicate the initial equi- librium outcomes for output, the interest rate, the exchange rate and label the points (Yo, Ro. Eo). (b) (5 pts.) Short-run: Using the same graph from part (a), label the new curves in the short run (IS₁, LM₁, UIP₁), reflecting any shift, and indicate the short-run equilibrium outcome (Y₁, R₁, E₁). Figure 1: Template for IS-LM diagram UIP B La Use the IS-LM model and create an enlarged version of Figure 1 to answer the following question. Suppose in period 0 that the United States is initially at full employment. The central bank operates a fixed exchange rate regime pegged to E. Then, in period 1 there is a temporary increase in government spending that lasts for one period. (a) (5 pts.) Label the initial curves as (ISo, LM, UIPo). Indicate the initial equi- librium outcomes for output, the interest rate, the exchange rate and label the points (Yo, Ro. Eo). (b) (5 pts.) Short-run: Using the same graph from part (a), label the new curves in the short run (IS₁, LM₁, UIP₁), reflecting any shift, and indicate the short-run equilibrium outcome (Y₁, R₁, E₁). Figure 1: Template for IS-LM diagram UIP B La

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The ISLM model is a macroeconomic framework that combines the Keynesian theory of aggregate demand with the classical theory of money supply It is use... View the full answer