Macroeconomics Answers

Why did Keynes believe that the government should control the level of aggregate demand in the economy

Why did Keynes believe that the government should control the level of aggregate demand in the economy

Here is an excerpt from a recent article about the economy:

For some economists, the danger of inflation starts with

the reckless strategy of the Federal Reserve to print a

massive amount of money out of thin air in an attempt to

stimulate the economy. These funds haven’t made it into

the markets and the economy yet, but it is a mathematical

certainty that once the this money passes through

the reserves and hits the markets, inflation will increase

dramatically.

Use your knowledge of the money supply, inflation and the

Federal Reserve System to explain briefly what these economists

are talking about. Be sure to explain what they mean

by “mathematical certainty”?

1. With the aid of a diagrams, briefly explain how interest elasticities and demand for money affect the slope of the IS and the LM curve.

2.With the aid of diagrams, brieftly explain the effectiveness of fiscal and monetary policy under fixed exchange rate system with perfect capital mobility within the IS-LM-BOP framework.

(a) . Given that in an economy

C = 0.8 (1-t) Y

t = 0.25

I = 900 - 50i

𝐺̅ = 800

L = 0.25Y - 62.5i

(𝑀̅/𝑃̅) = 500

(a) Derive the equation for the IS curve.

(c) What are the equilibrium levels of income and

the interest rate?

(d) Monetary & fiscal policy multiplier. 6

b) State whether the following statements are

TRUE or FALSE. Give reason(s) in support

of your answer. 5

i. Higher the marginal propensity to consume,

higher is the size of multiplier

ii. If investment is very sensitive to interest rate,

then we have a flat IS curve

(c) Use the following information (in rupees):

Income (Y) = 1,00,000

Nominal Money Supply (M) = 80,000

Price Level (P) = 20

Calculate the money growth rate required to

finance the budget deficit of Rs.10,000 in an

economy.

With the aid of diagrams, brieftly explain the effectiveness of fiscal and monetary policy under fixed exchange rate system with perfect capital mobility within the IS-LM-BOP framework.

With the aid of a diagrams, briefly explain how interest elasticities and demand for money affect the slope of the IS and the LM curve.