1.)    According to the 3-graph framework, AD/AS, and the IS-LM model, what happens to the real wages, unemployment, interest rates, income, consumption, investment, money demand and money supply when

a)      The central bank increases the money supply?

b)      The government increases government purchases?

c)       The government increases taxes?

Illustrate your answer with graph(s) and note that you may not be able to answer every part because each model has its limits.

2) Use AD/AS and IS/LM to illustrate a) a supply side recession and b) a demand side recession.

3.)    Suppose that the government wants to raise investment but keep output constant. In the IS-LM model, what mix of monetary and fiscal policy will achieve this goal? In the early 1980’s, the US government cut taxes and ran a budget deficit while the Fed pursued tight monetary policy. What effect should this policy mix have?

4.)    Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price level, and the interest rate of

a)      An increase in the money supply.

b)      An increase in government purchases.

c)       An increase in taxes.

5.)    The Fed is considering two alternative monetary policies:

·         Holding the money supply constant

·         Adjusting the money supply to hold the interest rate constant

In the IS-LM model, which policy will better stabilize output if

a)      All shocks to the economy arise from exogenous exchanges in the demand for goods and services?

b)      All shocks to the economy arise from exogenous exchanges in the demand for money?