Reference no: EM133268322

Conceptual

Question 1. In the text we describe the effect of an open market purchase by the Fed. a. Define an open market sale by the Fed. b. Show the impact of an open market sale on the interest rate and output. Show both the immediate-and the longer-term impacts.

Question 3. What is a liquidity trap? If the economy was stuck in one, would you advise the use of mon-etary or fiscal policy?

Question 4. What is crowding out, and when would you expect it to occur? In the face of substantial crowding out, which will be more successful-fiscal or monetary policy?

Technical

Question 1. the economy is at full employment. Now the government wants to change the composition of demand toward investment and away from consumption without, however, allowing aggregate demand to go beyond full employment. What is the required policy mix? Use an IS-LM diagram to show your policy proposal

Question 2. Suppose the government cuts income taxes. Show in the IS-LM model the impact of the tax cut under two assumptions: (1) the government keeps interest rates constant through an accommodating monetary policy. (2) the money stock remains unchanged. explain the difference in results.

Question 3. Consider two alternative programs for contraction. One is the removal of an investment subsidy; the other is a rise in income tax rates. Use the IS-LM model and the investment schedule, as shown in Figure 12-9, to discuss the impact of these alternative policies on income, interest rates, and investment.

Question 4. In Figure 12-10 the economy can move to full employment by an expansion in either money or the full-employment deficit. Which policy leads to E1 and which to E2? how would you expect the choice to be made? Who would most strongly favor moving to E1? versus E2? What policy would correspond to "balanced growth"?