Economics Homework

ECN 438 - Homework 4        

Analyze the effects of each of the shocks below using the three diagrams I have been using in class:  the IS-LM diagram, the money market diagram, and the FX market diagram.  In each diagram, use point A to identify the initial, pre-shock macro equilibrium; use point B to identify the new equilibrium once the economy has adjusted to the shock, assuming no change in the money supply; use point C to identify the new equilibrium assuming that the home country adjusts its money supply to keep domestic output (Y) at its initial, pre-shock level; and use point D to identify the new equilibrium assuming instead that the central bank adjusts the money supply to keep the exchange rate at its initial, pre-shock level.  So, for each shock, there will be three diagrams with each diagram containing the four points A-D.  Be sure to label your diagrams fully and show all of the involved shifts of curves.

Do this for each of the following shocks:

1.  an increase in the home country’s individual income taxes (T)

2.  an increase in foreign output/income (Y*) – assume there is no change in the foreign

     interest rate.

3.  an increase in home country money demand (L)

4.  a drop in the expected future value of the home country’s currency exchange rate