Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level.(a)Tougher immigration laws reduce the working-age population.(b)There's increased volatility in the prices of stocks and bonds.(c)The government tries to achieve tax equity by an increase in the corporate tax rate.(d)Increased computerization reduces stock market brokerage costs.

What will be an ideal response?

(a)The decline in labor supply increases the real wage and reduces employment and output, 
shifting the FE line to the left. The LM curve shifts up and to the left as the price level rises to restore equilibrium. As a result, the real interest rate rises, reducing consumption and investment.
(b)Real money demand rises, which shifts the LM curve up and to the left. To restore equilibrium, 
the price level must decline, shifting the LM curve down and to the right. There's no effect on any other variable.
(c)The higher tax rate reduces investment, shifting the IS curve down and to the left. To restore 
equilibrium, the LM curve shifts down and to the right as the price level falls. As a result, the real interest rate declines, so consumption increases. There's no change in the real wage, employment, or output.
(d)Increased liquidity on nonmoney assets reduces money demand, shifting the LM curve down 
and to the right. The price level rises, to restore equilibrium by shifting the LM curve back up and to the left. There's no effect on the other variables.

Economics

You might also like to view...

Checking deposits at banks are

A) money. B) not money because they are an intangible. C) money only because they are insured by the FDIC. D) not money until they are converted into currency.

View
Economics

If the price of a pizza increases and the demand curve for pizza does not shift, then the consumer surplus from pizza will ________

A) increase B) decrease C) equal the producer surplus if the market produces the efficient quantity of pizza D) remain the same

View
Economics

If a road is congested, then use of that road by an additional person would lead to a

a. negative externality. b. positive externality. c. Pigovian externality. d. free-rider problem with rush hour drivers stuck in traffic.

View
Economics

To answer the question, refer to the following table showing a demand schedule:  If price falls from $150 to $100,

A. an arrow representing the price effect points down and is shorter than an arrow for the quantity effect. B. arrows representing the price and quantity effects both point down. C. total revenue moves in the same direction as the arrow representing the price effect. D. the arrow representing the price effect points down and the arrow representing the quantity effect points up. E. both c and d 

View
Economics