ECON 420 Intermediate Macroeconomics Midterm 2 Part II
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Summer I 2022
ECON 420 Intermediate Macroeconomics Midterm 2 Part II
Answer both questions
1. Covid-19 Pandemic, Recession and IS-LM Model (20 pts)
During the COVID- 19 pandemic, many countries experienced a recession in the first quarter of 2020. Starting with an initial equilibrium in the fixed-price IS-LM model for a country with no foreign sector, examine the impact of the pandemic on output and employment by showing how the IS and LM curves would have shifted without policy intervention by policymakers. In particular, comment on how the pandemic affected consumer and business demand and which curves shifted and in what directions (indicated with arrows) as a result. On the same graph, show how the various policy interventions reversed the IS and/or LM curves.
2. Policy Effects in the fixed-wage versus flexible-wage Keynesian models (20 pts)
Compare the effects of an increase in government spending on output, employment and interest rate for the fixed-wage Keynesian model versus variable-wage Keynesian model. Be sure to draw two graphs, one for the IS-LM schedules showing clearly how the curves shift and another for aggregate demand and aggregate supply showing how the curves shift. Clearly indicate with arrows the directions of the changes illustrating an increase or a decrease in the variables, stating which distances represent the changes in those variables.
2022-06-15