Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020. During
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Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020.
- During March 2020, many states went into a lockdown and most people stopped shopping for goods and services out of fear and uncertainty. Using the IS-LM framework, graph the effect of this shock on the IS curve. What's the impact on output and the interest rate?
- At the same time, people concerned about the health of financial institutions, withdrew cash and held onto their funds instead of depositing them at banks. Using the IS-LM framework, graph the effect of this shock on the LM curve. What's the impact on output and the interest rate?
- Assume that we observed the interest rate fall.Which shock was more significant (larger), the one in (a) or (b)?
- Graph the effects of the shocks in (a) and (b) on Aggregate Demand.
- The government passed a fiscal stimulus package which increased government expenditures and reduced taxes.At the same time, the Fed increased money supply. Explain the effects of these interventions in the IS-LM framework and on Aggregate Demand. (which policy shifts which curve in what direction and what is the ultimate effect on AD?)
- Using Mundell-Fleming model, what is the effect on the exchange rate of the shocks in a and b? Does the model predict that the dollar appreciates or depreciates?
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