Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect a reduction in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
A reduction in G will cause Z to decrease and the IS curve to shift left. As demand decreases, Y will fall causing a decrease in money demand. The decrease in money demand will cause an decrease in i. As i falls, the demand for the domestic currency will decrease causing a depreciation. This depreciation will cause a rise in NX. Any increase in I and the increase in NX only partially offset the effects of the reduction on demand and output.
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According to the above figure, what will the price level be in the new long-run equilibrium?
A) Less than 100 B) 115 C) 100 D) 110
In a purely competitive market place, the firm's output will be determined by
A) where MR = MC. B) where MR = ?y/?N. C) where MP = ?y/?N. D) where MC = P.
As a percentage of GDP, U.S. imports have been ________ and U.S. imports have been ________ since 1950
A) growing; declining B) declining; growing C) growing; growing D) declining; declining
If money raised in the issue of new stocks and bonds is used effectively,
a. the income from them is not subject to double taxation. b. a firm need not meet SEC requirements. c. the stock is being "watered." d. they generate the means of repayment.