Draw a graph showing the IS–LM model and identify the initial equilibrium. a. For each of the following changes, show the effect on the output gap and the real interest rate. i. The government increases taxes. ii. The Fed decreases the money supply. iii. Consumers experience an increase in wealth due to increases in stock prices. b. […]

According to an article in the Economist magazine the IS-LM model’s “main virtue is that it brings together both the real and financial parts of the economy.” Briefly explain how the IS-LM model brings together the real and financial parts of the economy. Why would doing so be a virtue in a macroeconomic model?

This appendix demonstrates why the IS–LM model accurately represents movements in the real interest rate and the output gap during the Great Depression. a. Review the discussion of the 2007–2009 financial crisis in the chapter. Use the IS–LM model to show the approximate movements of the real interest rate and the output gap during that period. b.

Review this week’s Learning Resources and consider visual displays of data.For additional support, review the Skill Builder: Unit of Analysis and the Skill Builder: Levels of Measurement, which you can find by navigating back to your Blackboard Course Home Page. From there, locate the Skill Builder link in the left navigation pane.Using the SPSS software,

In 2009, Simon Johnson, former chief economist at the International Monetary Fund, believed that Fed policies might lead to a sharp increase in inflation. He argued: The large increase in credit from the Federal Reserve can potentially push up prices, even though unemployment remains relatively high. . . . If this seems far-fetched, remember the

The output gap can be difficult to measure because potential GDP must be estimated, and economists’ estimates differ. In 2012, the Congressional Budget Office (CBO) estimated that potential GDP was about $1 trillion lower than the CBO’s 2007 forecast had predicted. a. Was the output gap larger or smaller (in absolute value) in 2012 than

In the aftermath of the 2007–2009 financial crisis, the Fed became concerned about deflation. a. Use the IS–MP model including the Phillips curve to show how a decrease in aggregate expenditure could cause deflation. b. What policies should the Fed pursue to attempt to prevent deflation? Use the IS–MP model including the Phillips curve in your answer.

When financial markets do not function well,savers and investors waste resources, and the economy is less efficient. a. How might problems in financial markets affect employment and economic growth? b. Some people argue that the Fed should not interfere in financial markets. Why is maintaining the stability of financial markets important to the Fed’s other

Explain how the Fed uses open market operationsto target the federal funds rate. Why does the value of the federal funds rate matter? Why is it important to have a central bank to act as a lender of last resort?

Describe the Fed’s three traditional monetary policy tools. How can the Fed use each of these tools to either increase or decrease bank reserves? Briefly explain how the Fed can reduce the federal funds rate. Why is the federal funds rate considered important if no households or firms (other than banks) can borrow or lend