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Homework 3 Verma

Homework 3 Verma - HW 3-Econ 305(due in class on Thursday...

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HW 3-Econ 305 (due in class on Thursday September 24 th , 2015) 1. Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain with the help of a graph what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain. 2. Explain in detail what effect a Fed purchase of bonds will have on: (1) the LM curve; and (2) the IS curve. 3. Increases in the budget deficit are believed to cause reductions in investment. Based on your understanding of the IS-LM model, will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain. 4. What effect does the existence of discouraged workers have on the ability of the official unemployment rate to provide accurate information about the extent to which labor is employed?
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