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Handout 8 - part b What is the Fed likely to do(relative to...

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Econ 3140 Fall 2009 Handout #8 Reading assignment: Chapter 11 1. Question Two from Abel et.al., Chapter 11, numerical. 2. (a) Draw a °gure, using the Keynesian IS ° LM framework, of an economy in reces- sion. (b) Now suppose the IS curve shifts up and to the right far enough that if the real interest rate is unchanged, output will increase beyond full employment. If the Fed±s goal is to move output to its full-employment level, what must happen to the real interest rate? What is the e/ect on the price level? (c) Suppose, before the Fed can act, that the government announces a restrictive °scal policy, shifting the IS curve down and to the left relative to its position in
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Unformatted text preview: part b: What is the Fed likely to do (relative to what it would do if &scal policy wasn±t restrictive) if its goal is to target full-employment output? What happens to the real interest rate relative to what it is in part b: ? 3. According to the Keynesian IS & LM model, what is the e/ect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run. (a) Expected in²ation rises. (b) Wealth increases. (c) Labor supply decreases due to a change in demographics. (d) The future marginal product of capital decreases. 1...
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