Q1: Why might the actual investment spending found in Y be different than planned investment spending found in AE? Q2: For each of the following events, 1) state whether there is movement along the IS curve or a shift, and 2) the direction of the shift or movement along. If the IS curve isn’t affected, be sure to state that too. The real interest rate decreasesFirms begin to expect lower future profitsGovernment spending increasesReal GDP (output) increases Q3: In the figure below, what are some possible explanations of the shift in Aggregate Expenditure? Q4: Describe, in detail, how and why the economy moves from Y1 to Y2. (Hint: think of the economy as staying at Y1 immediately after AE shifts up and observe the relationship between AE and Y1. Then describe what changes in order to get us to Y2.) Q5: Type in the multiplier you computed and the end result for the total expenditures. We had a question like this in the last problem set. If MPC = 0.75 and Lockheed Martin sells an additional $1 billion fighter, by how much will output/expenditures increase after the initial change in spending goes through the entire multiplier process? Q6: For each of the following events, 1) state whether there is movement along the MP curve or a shift, and 2) the direction of the shift or movement along. If the MP curve isn’t affected, be sure to state that too. The Fed increases the target federal funds rateThe real GDP increasesThe federal government cuts spending Q7: How does a shift to the right of the IS curve affect the output gap and real interest rate? You don’t need to graph this, just briefly state what happens. Q8: How does a shift up of the MP curve affect the output gap and the real interest rate? You don’t need to graph this, just briefly state what happens. Q9: This question includes a button that allows you to upload a file. You can upload a word document. I linked a Word document below that you can use to copy curves and label them. You can also draw the graph by hand and take a photo, uploading the photo here or emailing it to me. Either way, answer the following with your graph: The causes of the 2007-2009 recession are fairly well-understood: earlier financial innovation and deregulation led to a boom, causing the prices of financial assets and real estate to rapidly increase. Eventually, the asset bubble burst and the real estate market collapsed. Use the IS-MP model to illustrate the cause of the recession. Also show how we recovered to get back to a long run equilibrium. There are a couple ways to show the recovery. Assume that we start at an output gap of 0.
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