ECON2P22_TutorialQuestions_Set_4.pdf - ECON 2P22 Intermediate Macroeconomics I Fall 2019 Tutorial Questions Set No 4 The IS-LM model Week of October 7th

ECON2P22_TutorialQuestions_Set_4.pdf - ECON 2P22...

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1 ECON 2P22: Intermediate Macroeconomics I Fall 2019 Tutorial Questions: Set No. 4 The IS-LM model Week of October 7th, 2019 These tutorial questions are aimed at further reinforcing understanding of the IS-LM model and its applications in macroeconomics. To answer these questions it is helpful to read the material covered in Chapter 5 of the textbook. Question 1: The IS-LM model (a)For each of the following hypothetical events, state whether the initial impact is to shift the IS curve or the LM curve: (i)Increase in government pay schedules (ii)Introduction of an electronics payments system (iii)Shifts in asset-holders preferences from bonds to money (iv)Reduced expected profits on new investment (b)Suppose that investment spending is extremely sensitive to the interest rate to the extent that the IS curve is flat. What are the implications with respect to the effectiveness of monetary and fiscal policies? Demonstrate your answers using IS-LM diagrams.

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