1 CORNELL UNIVERSITY Professor Levon Barseghyan Econ 3140 Fall 2012 Second Prelim The answers should be short and straight to the point. Use graphs when possible. First provide the answer, and then briefly explain how you got it. 1. IS-LM Model (30 points, 15 points for each sub-question) Consider the IS-LM model with sticky prices and sticky wages and consumption function as specified in class: C(Y-T, r), i.e. Ricardian Equivalence does not hold.What is the impact of the following changes on short run economic activity - output, the interest rate, consumption, investment and national savings? a)Fed increases money supply. b)Because of high national debt, government is forced to raise taxes. If for any of the five macro variables in question - output, the interest rate, consumption, national savings and investment - the answer seems ambiguous, state so clearly. Then either explain why or make an assumption that resolves the ambiguity. 2. IS-LM Model (30 points+10 points) Consider case b) from the question above: government is forced to raise taxes.