Author Question: Assume the exchange rate is fixed. Using the IS-LM model, graphically illustrate and explain what ... (Read 50 times)

humphriesbr@me.com · **on:** Jun 30, 2018

Assume the exchange rate is fixed. Using the IS-LM model, graphically illustrate and explain what effect an increase in consumer confidence will have on the domestic economy. In your graphs, clearly label all curves and equilibria.

What will be an ideal response?

Question 2

As an economy adjusts to an increase in the saving rate, we would expect output per worker

A) to increase at a constant rate and continue increasing at that rate in the steady state.
B) to increase at a permanently higher rate.
C) to decrease at a permanently higher rate.
D) to return to its original level.
E) none of the above

skipfourms123 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

An increase in consumer confidence will cause an increase in C and will cause demand to rise and the IS curve to shift to the right. As Y rises, money demand will increase and the domestic interest rate will tend to rise. If i rises, there will be tremendous pressure on the domestic currency to appreciate as demand rises. The central bank cannot let this occur. To prevent this, it must increase the money supply so that i does not rise. We will observe an increase in Y, no change in i, an increase in I (via the increase in I), and a reduction in NX caused by the rise in imports.

Answer to Question 2

E