f07 ec51 ps7

f07 ec51 ps7 - Economics 51D 29 October 2007 PROBLEM SET 7...

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Economics 51D 29 October 2007 PROBLEM SET 7 1. Use the IS-LM model in conjunction with the AS-AD model to analyze the following situations. A. Suppose the government cuts taxes by $100 billion. Show and explain the effects on the short-run equilibrium in the IS-LM model and compare the effects between using the IS-LM model and using the Keynesian Cross model. Ignore crowding out for now. B. Suppose the Fed makes a huge open-market sale. Show and explain the effects on the short-run equilibrium in the IS-LM model and compare the effects between using the IS-LM model and using the Money Market model alone. 2. More Fun with the IS-LM Model… A. Show how we can represent the Liquidity Trap in the IS-LM model and what it means for monetary policy’s ability to stimulate the economy. B. Can the IS-LM model capture the effects of crowding out? If so, how does it show them? C. Suppose that the primary goal of macroeconomic policy is to affect real GDP, at least in the short run (to stimulate the economy when it falls into recessions and slow it down when it overheats). Use the IS-LM model to show how policymakers can choose between monetary and
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This note was uploaded on 03/31/2009 for the course ECON 5161 taught by Professor Fullenkampf during the Fall '07 term at Duke.

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f07 ec51 ps7 - Economics 51D 29 October 2007 PROBLEM SET 7...

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