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

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Econ 3140 Fall 2009 Handout #8 Reading assignment: Chapter 11 1. Question Two from Abel et.al., Chapter 11, numerical. 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 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 wasnt 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 ination 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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This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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