Given the normal IS-LM and AD-AS Given the normal IS-LM and AD-.docx - Given the normal IS-LM and AD-AS Given the normal IS-LM and AD-AS DescriptionA

Given the normal IS-LM and AD-AS Given the normal IS-LM and AD-.docx

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Given the normal IS-LM and AD-AS Given the normal IS-LM and AD-AS DescriptionA liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest." (1) Show the effect of the increase of M by the government using graphs. (Be careful about intersection points in the graphs.) (2) Using total differentiation, calculate
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Unformatted text preview: the first (only LM), second (IS-LM) and third multiplier (AD-AS) of the increase of money supply on Y, dY/dm = ?, and demonstrate these multipliers in the graphs. (3) Now, assume that we are in the liquidity trap. Demonstrate the graphs and calculate dY/dm again (4) How do you justify unconventional monetary policy such as quantitative eashing in this case? Show the change in equilibria in the IS-LM and AD-AS graph...
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