Chapter 12 Assignment_2011

Chapter 12 Assignment_2011 - Lahore School of Economics...

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Lahore School of Economics Macroeconomics II In Class Assignment Chapter 12 – Problems and Applications Question 2 The small economy is in recession, as Y < Y’.  In the IS-LM Model, the trade is balanced at  ‘e’.   Under   floating   exchange   rates,   if   the  economy   wants   to   have   full   employment  level,   expansionary   monetary   policy   is  implemented.   This   shifts   the   LM   curve  rightwards, which depreciates  the exchange  rate. If the economy wants balanced trade as  well, the authorities would have to incur fiscal  expansion, which would not shift the income  level but appreciate the exchange rate to ‘e’. Question 6 A tax cut now shifts both the  IS * and the  LM * curves. Figure 12–22 shows the case of floating  exchange rates. The  IS * curve shifts to the right   . The  LM * curve shifts to the left, however. We 
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This note was uploaded on 02/13/2012 for the course ECON 121 taught by Professor Adam during the Spring '11 term at Bunker Hill.

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Chapter 12 Assignment_2011 - Lahore School of Economics...

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