Answer to Question #205425 in Macroeconomics for levy

Question

In the North Island economy, all domestic production is consumed domestically, and there is no import of foreign goods. The policy makers in North Island fear that the domestic production is too high, which may lead to inflation in the longer run (even though we assume a constant price level in the short run). At the same time, it is an election year, and the sitting government has promised to not decrease the households’ disposable income.

Assume that the government does act appropriately to improve the situation.

B) Describe in words, using full sentences, the effects on the market for goods and services in North Island. Which curves are shifting, why do they shift and in what direction?

C) Describe in words, using full sentences, the effects on the market for money in North Island. Which curves are shifting, why do they shift and in what direction?

D) Describe in words, using full sentences, the effects on the overall economy. Explain the shifts and movements in the IS-LM-diagram

Answer 1

(a)lack of exports and imports will hinder people and firms with more market for their goods and services. When goods are produced and consumed domestically, the market prices will rise with the reduced quantity of goods produced. The supply of the goods will reduce in the market and the supply curve will shift upwards.

(2)there will be increased borrowing and loan issuing for people to invest domestically. The money demand will then shift to the right.

from MD to MD1.

(c)since the money supply in the market will be high, the interest rates will be low and the LM curve will shift to the right from LM^, to LM^,,.