increases real GDP demanded, and an increase in net taxes decreases real GDP
demanded, other things remain constant.
4) Give short definitions of both the IS and LM curves and briefly explain how this model can help economists understand the interaction between the goods and money markets. Show how the IS and LM curves can be derived and explain how equilibrium is reached.
The IS curve describes the combination of interest rates and output that clear the goods
and services market in the short run. The goods and services market is said to clear when
spending by consumers, firms, the government (and foreigners if an open economy) on
goods and services equals the production of goods and services. The basic equation for
the IS curve in a closed economy is closely related to the national income accounting
identity Y = C+I+G, where Y is GDP
The LM curve summarizes all the combinations of income and interest rates that equate
money demand and money supply. The LM curve in conjunction with the IS curve will
help pin down the interest rate in the economy.
It is well known that establishing the elasticity of the IS and LM curves
provides basic information about the predicted outcome of fiscal and monetary policies in
a given model, with a combination of inelastic LM and elastic IS implying fiscal
crowding out and potent monetary policy, whereas elastic LM and inelastic IS lead to
potent fiscal and weak monetary effects. Estimation of these locuses
5) Distinguish between monetary base and broad money. Explain what role commercial banks have in the creation of broad money. What implications does this have for monetary control
The monetary base consists of the liabilities of central bank of a country which...
Show how the IS and LM curves can be derived and explain how equilibrium is reached.
6) Distinguish between different kinds of unemployment. What kind of unemployment can be reduced by supply side policies and what specifically could those policies be Use a diagram to explain these policies
1) Using the Keynesian model of injections and withdrawals in the goods market, explain what happens if people decides to save more at any level of income. Make sure you express the process of adjustment and assess what implications the results may have for policy.