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University of California, Irvine Department of Economics Intermediate Economics II: Econ 100B Winter 2009 Prof. Safarzadeh Assignment # 4 Student...

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University of California, Irvine Department of Economics Intermediate Economics II: Econ 100B Winter 2009 Prof. Safarzadeh Assignment # 4 Student Name :_________________ Note: Please turn in the multiple-choice part of the test on Scantron. Marking of answers on the test will not be accepted. I- In each problem below, you are to illustrate the economy with the appropriately shaped IS-LM curves. Unless explicitly stated otherwise, make the following assumptions: consumption depends upon income, investment depends inversely upon the interest rate, government expenditures are exogenous and money demand depends positively on income and inversely upon interest rate. Keep in mind that income elasticity of demand for money is way higher than interest elasticity of demand for money and the income effect on demand for money over-weighs interest rate effect. In each case, draw the shift(s) in the IS-LM curves which result from the exogenous actions taken and indicate in the space provided whether each variable will increase (+) , decrease (-) , remain unchanged (0) , or have ambiguous sign (?) . Please, number the curves so that the direction of each shift will be clear. Mark the original equilibrium by E 1 and the final equilibrium by E 2 . Unmarked graphs will be discounted in credit. Variables: r is interest rate, Y is income, C is consumption, I is investment, BD is budget deficit, Md is demand for money, Ms is money supply, TD is trade deficit, SM (stock market indicators). A. Standard IS-LM model (Questions 1-5 are independent of each other. They don’t follow each other). 1. The economic booms of 1990s resulted in government budget surplus at the end of 1990s. One proposal on how to spend the surplus was to return part of the surplus to tax payers through an income tax cut. This policy was implemented in 2000. What were the expected sort-run effects of the policy? r Sort-Run | Y = . ..... ............. | r = . ..... ............. | C = . ..... ............. | I = . ..... ............. | BD = . ..... ............. | Md = . ..... ............. | Ms = . ...... ............ |____________________________ Y TD = . ...... ............ 2. The Fed is selling T-Bills through open market operation. r Sort-Run | Y = . ..... ............. | r = . ..... ............. | C = . ..... ............. | I = . ..... ............. | BD = . ..... ............. | Md = . ..... ............. | Ms = . ...... ............ |____________________________ Y TD = . ...... ............
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3. The government increases expenditures without increasing taxes or the money supply ( Hint: this is a pure fiscal policy). r Sort-Run | Y = . ..... ............. | r = . ..... ............. | C = . ..... ............. | I = . ..... ............. | BD = . ..... ............. | Md = . ..... ............. | Ms = . ...... ............ |____________________________ Y TD = . ...... ............ 4. The government raises expenditures by issuing T-Bills and selling them to Fed. . r Sort-Run | Y = . ..... ............. | r = . ..... ............. | C = . ..... ............. | I = . ..... ............. | BD = . ..... ............. | Md = . ..... ............. | Ms = . ...... ............ |____________________________ Y TD = . ...... ............ 5. The Fed buys securities from the public. r Sort-Run | Y = . ..... ............. | r = . ..... ............. | C = . ..... ............. | I = . ..... ............. | BD = . ..... ............. | Md = . ..... ............. | Ms = . ...... ............ |____________________________ Y TD = . ...... ............ II. Multiple Choice Questions. Please answer on ScanTron ______1- Other things the same, in the Circular Flow model of the economy savings have a- expansionary effect on the economy b- inflationary effect on the economy c- recessionary effect on the economy d- no effect on the economy ___2- In the Circular Flow model of the economy, If taxes > government spending, government budget will have
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