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15.012 Profs. Cavallo & Rigobon All SectionsSpring 2011 Applied Macro and International Economics Assignment #1 Due Date: Session 6 This set of exercises allows you to apply the lessons of the IS-LM model to some real-world cases. Please feel free to use IS-LM diagrams (as the one on this page) wherever possible. We use this graph to show (for example) how expansionary monetary policy affects an economy. In the case of expansionary monetary policy, the LM curve shifts out. The extra liquidity in the economy allows interest rates to fall, and investment and output to rise (see below). i Y IS LM i Y IS LM B A LM’ - 1 -
15.012 Profs. Cavallo & Rigobon All SectionsSpring 2011 The questions below will give you practice working through the IS-LM model. - 2 -
15.012 Profs. Cavallo & Rigobon All SectionsSpring 2011 Question 1: The Early 1980’s The early 1980s were an exciting time for the macroeconomy. President Reagan was attempting a tax cut revolution while the Federal Reserve, under Chairman Paul Volcker, was attempting to control inflation.