301D, Practice problem set3-1

For this question assume that the economy is

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10. For this question, assume that the economy is initially operating at the natural level of output. A reduction in consumer confidence will cause A) an increase in investment in the short run. B) a reduction in the real wage in the medium run. C) an increase in the interest rate in the medium run. D) ambiguous effects on investment in the medium run. E) none of the above 11. For this question, assume that the economy is initially operating at the natural level of output. A simultaneous increase in taxes and increase in the money supply will cause which of the following?
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12. Suppose a liquidity trap exists. Graphically illustrate and explain the effects of an increase in government spending using the IS-LM model. Answer: Given that the liquidity trap already exists, we know that the equilibrium in the IS-LM model occurs where the IS curve intersects the LM curve on the horizontal portion of the LM curve. When G increases, demand will increase. The IS curve will shift to the right causing an increase in output. The interest rate will either not increase (because we are still operating in the presence of a liquidity trap) or increase. Draw the graph accordingly 13. Based on your understanding of the aggregate supply and aggregate demand model
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