International financial market and korean economy Exercises for the ISLM Framework

International Financial market and Korean Economy
Exercises for the IS-LM Framework

Prepared by Seok-Kyun HUR


Exercises for the IS-LM Framework
Question 1. Keynes believed that unstable investment caused
the Great Depression. Using the simple Keynesian
model(consider only the goods market equilibrium),
(1) Demonstrate graphically and explain how a fall in
investment reduces equilibrium output.
(2) Assess the impact of $1 fall in investment on the
equilibrium output?


Exercises for the IS-LM Framework


Question 2. Equal increases in government spending and
taxes increase equilibrium output. Explain and
demonstrate this graphically.


Size of the balanced budget fiscal multiplier is 1 in the goods
market.



Will it hold the same magnitude if the money market is also
included in analysis?

Exercises for the IS-LM Framework


Question 3. The Federal Reserve increases interest rates
when they want to reduce aggregate demand to fight
inflation. How do increases in the interest rate reduce
aggregate demand?


Describe (a) channel(s) through which lowered
interest rate reduces the aggregate demand.


Exercises for the IS-LM Framework


Question 4. Using the IS-LM model, show graphically
and explain the effects of a monetary expansion combined
with a fiscal contraction. How do the equilibrium level of
output and interest rate change?



Output?
Interest rate?


Exercises for the IS-LM Framework



Question 5. Using the IS-LM model, show graphically
and explain the effects of a monetary contraction.
(1) What is the effect on the equilibrium interest rate and
level of output?
(2) Monetary contraction is made by CB’s Open Market
Operation. Then, what is its impact on the bond market?


Exercises for the IS-LM Framework


Question 6. Suppose that the demand for money is
completely insensitive to changes in the interest rate.
(1) Explain and show graphically the effect of a fiscal
expansion.
(2) What is this effect called?.


Exercises for the IS-LM Framework


Question 7. Suppose that the demand for money is
completely sensitive to changes in the interest rate.
(1) Explain and show graphically the effect of monetary
expansion.
(2) What is this effect called?.

Exercises for the IS-LM Framework


Question 8. Show graphically and explain why targeting
an interest rate is preferable when money demand is
unstable and the IS curve is stable.
 Money demand is influenced by a certain random
factor, which cannot be controlled by anyone.
 Interest rate targeting( inflation targeting is its official
name) is a monetary policy regime that the CB
sustains a certain level of the policy rate.