Demonstrate the derivation of the LM curve from the money market, Economics Homework Help

1. Demonstrate the derivation of the LM curve from the money market.

 2. Suppose the Keynesian investment function is vertical (perfectly inelastic). Explain the shape of the IS curve.

 3. Using the IS/LM/BP model, demonstrate the effect of each of the following changes. Assume that the economy
is a small country with perfect capital mobility (so a flat BP curve) and a fixed exchange rate (non-sterilized
intervention).

 a. An increase in tax rates 

b. An increase in government purchases 

c. An increase in the domestic money supply 

d. A fall in GDP in the rest of the world 

e. An increase in the domestic price level 

4. Using the IS/LM/BP model, demonstrate the effect of each of the following changes. Assume that the economy
is a small country with perfect capital mobility (so a flat BP curve) and a flexible exchange rate (non-sterilized
intervention).

 a. An increase in tax rates

 b. An increase in government purchases

 c. An increase in the domestic money supply 

d. A fall in GDP in the rest of the world 

e. An increase in the domestic price level 

5. Using the IS/LM/BP model, demonstrate the effect of each of the following changes. Assume that the economy
has an upward sloping BP curve (that is flatter than the LM curve) and a fixed exchange rate (non-sterilized
intervention). 

a. An increase in tax rates 

b. An increase in government purchases 

c. An increase in the domestic money supply 

d. A fall in GDP in the rest of the world
e. An increase in the domestic price level 

6. Using the IS/LM/BP model, demonstrate the effect of each of the following changes. Assume that the economy
has an upward sloping BP curve (that is flatter than the LM curve) and a fixed exchange rate (non-sterilized
intervention). 

a. An increase in tax rates 

b. An increase in government purchases 

c. An increase in the domestic money supply 

d. A fall in GDP in the rest of the world 

e. An increase in the domestic price level 

7. Suppose the economy experienced a period of rapid economic expansion. What would be the appropriate
response of the government and/or the central bank? Explain. 

8. Recently output growth slowed has slowed in China. Using the Solow model, explain why this pattern of
slowing was to be expected.

 9. Explain why the Solow model predicts that a slower pace of population growth will spur more rapid economic
growth. 

10. Suppose you have an economy with A = 1, k = 1, d = 0.05, and s = 0.1. If the value of α is 0.5, what is the
steady state level of output? 

11. Explain how a labor choice model may result in a backward bending labor supply curve. What must the
relative signs/sizes of the income and substitutions effects be? 

12. Suppose Susan has $1,000 in income this period, but no income in the next period (this is only a two
period example so nothing happens after that). Demonstrate how Susan determines how much to save and
how much to consume in both periods. How would her level of savings change if real interest rates increased? 

13. Suppose consumption is given by C = 1000 + 0.75 x Disposable Income while investment is given by I =
2000 – 20r. If government expenditures equal 0 (no expenditures) and the tax rate is 1/3 (the government
collects 1/3 of income as tax revenue), what is the equation of the IS curve? What are the values r-intercept
and the Y-intercept?

 14. Explain how sticky wages give rise to unemployment

15. What does the evidence show about the connection between higher interest rates and the level of
savings and investment? What ramifications does this have for the economy as the Fed begins slowing the
pace of growth of the money supply? 

16. What does the evidence around the Taylor Rule suggest about the Fed’s recent management of the
money supply? 

17. Suppose the Chinese economy continues to slow. Using economic models, explain the likely impact on
the US. 

18. Explain the “zero-bound” problem facing monetary policy. 

19. Consider the article “Canada Does the Global Economy a Favor.” How does this reading confirm
standard economic theory? How is it in conflict with standard economic theory?

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