9 - ECN101 Intermediate Macroeconomics Professor...

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ECN101 Intermediate Macroeconomics Fall 2008Professor E.A.FrenkelHomework ) SolutionsFor any typos or mistakes in the sketched solutions, please contact Yuan ([email protected])or Paul (pgaggl@ucdavis.edu)You can assume that we are dealing with a closed economy here.(1) You are an economic policy maker. Your economy is running at a less than full employment real income level. You want to raise the level of real income. Using the IS LM diagram, what policy (policies) might you suggest to reach your goal? Would the policy you recommend be related to whether or not you desired stable interest rates in your economy?Hints: Assume a fixed price level and a closed economy. You should be able to describe in words and show graphically what is happening in the economy as policy (policies) affect the economy and the income level rises.
LM1AInterest rate, rYIS1YThe IS-LM ModelFigure 1Y1IS2IS3LM2LM3r1BCD

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