Conceptual

1. how does the IS-LM model relate to the model of aggregate demand?

4. a. Why does a horizontal LM curve imply that fiscal policy has the same effects on the economy as those derived in chapter 10?

b. What is happening in this case in terms of Figure 11-3? c. Under what circumstances might the LM curve be horizontal?

6.* Between January and December 1991, while the U.S. economy was falling deeper into its recession, the interest rate on treasury bills fell from 6.3 percent to 4.1 percent. Use the IS-LM model to explain this pattern of declining output and interest rates. Which curve must have shifted? can you think of a reasonhistorically valid or simply imaginedthat this shift might have occurred?

1.

the following equations describe an economy. (think of C, I, G, etc., as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5.)

C = 0.8(1 t)Y t = 0.25

I = 900 50i

G = 800

L = 0.25Y 62.5i

M /

P = 500

a. What is the equation that describes the IS curve?

b. What is the general definition of the IS curve?

c. What is the equation that describes the LM curve?

d. What is the general definition of the LM curve?

e. What are the equilibrium levels of income and the interest rate?

2. continue with the same equations.

a. What is the value of G which corresponds to the simple multiplier (with taxes) of chapter 10?

b. By how much does an increase in government spending of income in this model, which includes the money market?

c. By how much does a change in government spending of

interest rate? d. explain the difference between your answers to parts a and b.

book:Macroeconomics 13^th edition

Rudiger Dornbusch