General Equilibrium Problem 2 Part 1 IS Shock SCENARIO 2 AN IS SHOCK Let s return to our original conditions Please write down the expressions for your ORIGINAL IS curve and LM curves in the space below IS r LM r Now draw another set of diagrams i e three separate diagrams identical to the first part of this problem i e we are starting at the same equilibrium point point A a FE IS LM diagram a desired savings equals desired investment Sd Id and a money market diagram locating this initial equilibrium point as point A Be sure to LABEL all diagrams completely 10 points for each correctly drawn and labeled diagram each diagram will have three different equilibriums points A B and C 30 points total In this scenario 2 we let those wonderful elected officials of ours increase G to 80 from 50 S2 a 4 points 4 points Derive a new expression for the IS curve r in terms of Y Please show all work S2 b 4 points Now solve for the short run equilibrium output Keynesian and the corresponding real rate of interest Please show all work Please label this short run fixed price equilibrium as point B S2 c 4 points In the short run what is the Keynesian Government spending multiplier Please show all work S2 d 4 points Solve for the real rate of interest in this long run equilibrium S2 e 4 points We now consider the long run when prices adjust Find the new price level associated with the long run equilibrium Please show all work Part 2 Crowding Out S2 f 4 points Derive a new expression for the LM curve Please show all work S2 g 4 points In the long run how much investment has been crowded out Please show all work Label this long run equilibrium as point C in all three of your diagrams
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