Question

Pleaseee type your explanation to be easy to understand and read

Consider the typical IS-LM set-up characterized by the following equations: IS : Y = C(Y - T) +I(Y. i) +G M LM: P =Y L(i) Suppose the economy is in a short run equilibrium. The government decides to perform contractionary fiscal policy by increasing taxes. (a) (5 points) Draw the effect this policy will have in the IS-LM framework (1 graph, Method 3). Label all axes, curves, the new and the old equilibrium.

Pleaseee type your explanation to be easy to understand and read

Answer 1

Interestrale LM 13: Y = C(Y-T)+1(Y, i) +G Y.LG) M E (5) IS Oulput (Y) where E is short run equilibrium point. 2 • (a) The govt. decides to perform contractionary fiscal policy by Increasing laces. suterentrale; T (766) 23 Y(sse). IS Curve shifts loft, because of given Interest rate ? E IS, IS, YEY, Oupad() E - new equilibrium old equilibrium E → (b) Output (decreases} Interest rate (decreases) Consumption (decreases) as consumption is fn of r. Investment (decreases).

int ; suppose fed implements (c) Follocoing the increase contrachonory monelenry policy LM curne shift left. t LM E2 lo Eo EL Iso SIS, Shiff of LM cume depends of magnitude of policy implencadede, (d) Output Output (decreases) Interest rate effect (oro change) f both are of equal magnitude.