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What factor(s) influence the slope of the LM curve?

1. In an aggregate demand/supply sticky-price framework, imagine that a poor country, starting from long-run equilibrium, is suddenly the recipient of some large amount of foreign capital and technology as a gift. If the central bank’s goal is price stability and output equal to potential output, what should the central bank do?
2. Again in the sticky-price AD-AS framework, discuss the impact of a change in government regulations that forces banks to pay a significantly higher interest rate on chequing accounts.

3. Consider an economy where aggregate planned expenditure, PE, can be written P E = c(1 − t)Y + ¯I + G¯ + X¯ − mY . That is, expenditure consists of consumption out of disposable income, investment, government spending, exports and imports. What will be the government spending multiplier in this economy?
4. What factor(s) influence the slope of the IS curve?
5. What factor(s) influence the slope of the LM curve?
6. Some economists attribute the US recession to the collapse of the US housing market. Is building houses consumption expenditure or investment expenditure? Diagram and discuss the short-run and long-run effects (i.e. after the price can start adjusting) of a sharp decrease in housing construction activity.

7. In 6, if the central bank’s goal is to maintain output at the long-run aggregate supply level and to keep prices stable, can they do anything following the housing crash? If so, what? Is it possible for the central bank to run into a zero-lower-bound problem?


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