HW5
Due: 8/1
1. Crowding out
What is crowding out? Will crowding out be more evident if the LM curve is steep?
Explain. 2. Expansionary Policies, AS/AD and IS/LM
a) Using AS/AD and IS/LM analysis, illustrate the short run effects of an
expansionary monetary policy. Assume that the SRAS curve is upward sloping,
but not vertical.
b) Using AS/AD and IS/LM analysis, illustrate the short run effects of an
expansionary fiscal policy (say, an increase in G). Assume that the SRAS curve
is upward sloping, but not vertical.
c) Using AS/AD and IS/LM analysis, illustrate the long run effects of the
expansionary policies in part a and part b. (Hint, in the long run, LRAS is
vertical).
3. Expansionary Policies in the Open Economy: IS*/LM*
a) Using IS*/LM* analysis, illustrate the short run effects of an expansionary
monetary policy. Assume that the exchange rates are fixed.
b) Using IS*/LM* analysis, illustrate the short run effects of an expansionary fiscal
policy. Assume that the exchange rates are flexible.
4. Identify and discuss in detail the different theories regarding the upward sloping
SRAS curve. Which of these theories allow for the market to clear? Which of these
theories fit with reality the best?
5. What is the Phillips curve? Provide a brief history regarding the curve, and its
usefulness in macroeconomic policy.
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