Economics test.

Sample questions:

1) Using only IS-LM, please show the effect of a tax cut. State the likely impact on r, Y, C and I.

2) Please answer the following in one to two sentences:

a. Is monetary policy more or less effective in a liquidity trap? Why?

b. Is fiscal policy more or less effective in a liquidity trap? Why?

c. Illustrate your answer from either a or b using an IS-LM graph.

3) Suppose there’s a stock market boom and as a result of increased wealth, consumer spending

[variable “a” in the equation C = a + m (Y-T)] goes up. Draw the effect in the IS-LM / AS-AD two-

graph model, and state the impact on r, Y, P, C, I, Unemployment rate and Pe.

4) If the Fed announces that they plan to reduce inflation – and people believe they will do so –

this alters the expected price level. Show the short run and long run impact on the two-graph

ISLM-ASAD model, and state the impact on r, Y, P, C, I, Unemployment rate and Pe.

5) Two part question:

a. Suppose the Democrats win control of the government in 2020 and decide their top

priority is reducing the deficit. Show the short-run effect on the ISLM-ASAD graph

b. Now, you are in charge of the Fed. Keeping in mind the dual mandate, how should you

react?

c. Suppose your reaction is exactly perfect. Show on a new graph the combined effect in

the short run and the long run of BOTH the change in A and the change in B. Then state

the effect on the 7 variables above.