New keynesian version of the fe-is-lm model

Assignment Help Business Economics

Reference no: EM131388877

The following exercise assumes that the economy responds as predicted by the New Keynesian version of the FE-IS-LM model.

In this question we will analyze the following statement, and show what would happen if the advice given was followed by the Fed: “Higher consumer confidence increases aggregate demand. To offset this we must decrease the money supply. Then the price level won't need to adjust to restore equilibrium, and we'll prevent inflation.”

Consider that an increase in of consumer confidence corresponds to an increase in households' expectations about their future income.

a) State what happens to the FE and IS curves. Explain with the help of graphs what happens in the short-run to the expected real interest rate, output and employment, consumption, savings and investment (If necessary assume that the shift of the FE line is smaller than the shift of the IS curve).

b) Explain with the help of two graphs how the economy converges to the short-run general equilibrium after the shock.

Reference no: EM131388877

Questions Cloud

Consider the oligopoly market with two firms : Consider the following Oligopoly market with two firms which produce a differentiated product and have the following demand functions. q1= 10 – P1 + (P2/2) q2 =10 – P2 + (P1/2) Total Fixed Costs to either firm is 10 dollars and there are no variable ..

Total change in spending as result of stimulus package : In order to financially stimulate the nation, the Federal government injected $800 billion dollars into the economy. However, the results were less than spectacular. One reason could have been a failure to understand the marginal propensity to consum..

Proponents of basic income argue : Proponents of a Basic Income (or Negative Income Tax) argue that it is a superior method of addressing income inequality than the Minimum Wage. discuss how, in a parallel universe with NO minimum wage but a Basic Income of approximately 2/3 of minimu..

World population and generates of income : The United States makes up approximately 4% of the world population but generates more than 20% of its income. The most recent number is $52, 587 per person versus a world average of $10, 163. React to this as a Utilitarian, a Rawisian, and personall..

New keynesian version of the fe-is-lm model : The following exercise assumes that the economy responds as predicted by the New Keynesian version of the FE-IS-LM model. State what happens to the FE and IS curves. Explain with the help of graphs what happens in the short-run to the expected real i..

Identify each of the variables and briefly explain meaning : Identify each of the variables and briefly explain the meaning. From the above list, use the relvant set of equations to derive the IS curve. Graph the IS curve on an appropriately labeled graph. From the above list, use the relevant set of equations..

Explain what fuzzy demand curve : After reading the chapter on demand theory, a classmate turns to you and says, “I’m rather confused. According to economic theory, people demand a good or service because it yields utility. This obviously does not apply to medical services. explain w..

Firm make as result of privatization : A state owned company is providing electricity at the price of $0, 105 and faces the demand for electricity P = 1.255 - 0.001Q. The company has a cost function C(Q) = 100.625 + 0.1050Q. What is the number of kilowatt hours of electricity produced and..

Cause an increase in employment in unionized occupation : Explain and demonstrate (graph) how a union might cause an increase in employment in the unionized occupation. Also, explain and demonstrate (graph) how this might, in this case, affect wages in related non-unionized occupations.

User Account

All Pages