Chapter 5 âu20acu201c The IS-LM Model - Blanchard...

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Financial Markets and Institutions
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Chapter 9 / Exercise 19
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Blanchard 4eChapter 5 – The IS/LM ModelPractice Questions1QUESTIONS1)First, define the LM curve. Second, explain why it has its particular shape.2)Explain the determinants of investment. Include in your answer an explanation of how a change in eachdeterminant affects investment.3)When the central bank pursues contractionary monetary policy, we say that this policy will result in anincrease in the interest rate, a reduction in investment, a reduction in demand, and a lower level ofequilibrium output. Explain what happens to the position of the IS curve as the central bank pursuescontractionary monetary policy.4)A fiscal expansion (e.g. a tax cut) will result in an increase in income, an increase in money demand, andan increase in the equilibrium interest rate in financial markets. Explain what happens to the position ofthe LM curve as policy makers pursue expansionary fiscal policy.5)Explain in detail what effect a Fed purchase of bonds will have on: (1) the LM curve; and (2) the IScurve.6)Explain in detail what effect a reduction in taxes will have on: (1) the LM curve; and (2) the IS curve.7)Based on your understanding of the IS-LM model, graphically illustrate and explain what effect anincrease in consumer confidence will have on output, the interest rate, and investment.8)Based on your understanding of the IS-LM model, graphically illustrate and explain what effect amonetary expansion will have on output, the interest rate, and investment.9)Increases in the budget deficit are believed to cause reductions in investment. Based on yourunderstanding of the IS-LM model, will a fiscal policy action that causes areductionin the budget
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Chapter 9 / Exercise 19
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