econ 13 - Econ 100B: Macroeconomic Analysis Fall 2008...

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Macroeconomic Analysis Fall 2008 Problem Set #13 ANSWERS (Due October 20 - 21, 2008) 1. Clearly and accurately draw and label a diagram of the IS—LM—FE Model. 2. Provide an economic explanation of the shape of the curve(s) in your diagram in #1. The IS curve shows the combinations of the real interest rate, r, and the level of economic output, Y, that maintain equilibrium in the market for goods and services. This is an inverse relationship, the downward slope indicating that as the real interest rate declines, desired consumption and desired investment will increase, thereby increasing the level of economic output. The LM curve shows the combinations of the real interest rate, r, and the level of economic output, Y, that maintain equilibrium in the money market. This is a positive relationship, the upward slope indicating that as the level of economic output (or income) rises, the demand for money will also increase. To maintain equilibrium with a fixed supply of money, this requires a higher real interest rate to reduce the demand for money to its original level. The FE line shows the combinations of the real interest rate, r, and the level of economic output, Y, that maintain equilibrium in the labor market. Because the labor market is not
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This note was uploaded on 03/31/2010 for the course ECON ECON taught by Professor Shomali during the Spring '04 term at University of California, Berkeley.

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econ 13 - Econ 100B: Macroeconomic Analysis Fall 2008...

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