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Unformatted text preview: ECON 101B: Section 16 Handout Date: 03/11/2011 Question 1 Explain the Pigou e/ect and why economists thought this would help end the Great Depression. Why did this theory fail to improve the economy? What actions should &scal and monetary authorities have taken to end the depression sooner? Question 2 Explain why each of the following statements is true. Discuss the impact of monetary and &scal policy in each of these special cases. 1. If investment does not depend on the interest rate, the IS curve is vertical. 2. If money demand does not depend on the interest rate, the LM curve is vertical. 3. If money demand does not depend on income, the LM curve is horizontal. 4. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal. Question 3 Suppose that the demand for real money balances depends on disposable income. That is, the money demand function is ( M=P ) d = L ( r;Y & T ) Using the ISLM model, discuss whether this change in the money demand function alters the following:...
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- Spring '08