Equilibrium Level of National Income Among Consumers, Investors and Government Paper This course examines further issues on the determination of the equili

Equilibrium Level of National Income Among Consumers, Investors and Government Paper This course examines further issues on the determination of the equilibrium level of national income and its allocation among consumers, investors and government. Particular attention will be paid to the role of government policy on macroeconomic equilibrium for an open and closed economy. Additional issues to be discussed include government debt and deficit, investment, money demand and money supply, unemployment, economic fluctuations, and growth. We will also discuss business cycles: recessions, depressions, revivals, expansions. Mankiw Chapter 18 – Financial System: Opportunities and Dangers
Questions for Review
1) Explain the difference between debt finance and equity finance.
2) What is the main advantage of holding a stock mutual fund rather than an individual
stock?
3) What are adverse selection and moral hazard? How do banks mitigate these problems?
4) How does the leverage ratio influence a financial institution’s stability in response to bad
economic news?
5) Explain how a financial crisis reduces the aggregate demand for goods and services.
6) What does it mean for a central bank to act as lender of last resort?
7) What are the pros and cons of using public funds to prop up a financial system in crisis?
Problems and Applications
4) In recent years, as described in this chapter, both the United States and Greece have
experienced increases in government debt and significant economic downturns. In what
ways were the two situations similar? In what ways were they different? Why did the two
nations have different policy options at their disposal?
Current Economic Situation
1) Use the LOE model in the SR to answer the questions below. Suppose the U.S. economy
started from an equilibrium point, in February 2020.
a. Show how the corona virus shock at first affected the economy, starting in March.
Use economic reasoning and graphs. That is, show how the lockdown affected
consumption, sales, employment, production, real interest rates, and prices in the
short run. In the IS-LM model, which curve shifted and to which direction? Show
the initial equilibrium point and the new equilibrium point.
b. Now, consider that the U.S. Central Bank (Federal Reserve Board) quickly decided
to implement monetary policy to help the economy, starting already in March (short
inside lag). Which policy or policies did the Central Bank pursue? Which open
market operation? And which credit policy? What is the effect of this policy on real
interest rate? In the IS-LM model, which curve shifted and to which direction?
Show the change redrawing the diagram from a)
c. Now, consider that the U.S. government (President and Congress) decided as
quickly as possible to implement fiscal policy to help the economy, starting in April
(longer inside lag). Which policy or policies did the U.S. government pursue? What
is the effect of this policy on real interest rate? In the IS-LM model, which curve
shifted and to which direction? Show the change redrawing the diagram from b)
d. Which policy is more effective in the short run?
Notice that the strength of the policies is an assumption that you can make. As long
as you shift the IS and LM curves to the right direction, how far they go the direction
is your call. Just notice that we know that now interest rates are very low, lower
than before the shock and should stay low for at least one year. Try to answer and
move your graphs so they are consistent to it.
Now, you can see that depending on the strength of the policies the effect of the
corona virus might last less time than without intervention.
e. Optional question: what do you think would happen to the market for foreign
currency in the SR before the central bank or government intervention? And with
their intervention?
2) Let’s study what might happen using the LOE model in the long run. Suppose the U.S.
economy started from an equilibrium point, in February 2020.
a. Show how the corona virus shock affects the economy, starting in March, showing
the effect in the long run, without any policy intervention. Use economic
reasoning and graphs. That is, show how the lockdown affected consumption, sales,
employment, production, and prices in the long run. In the market for loanable
funds (LOE in the LR), which curve shifted and to which direction?
b. Now, consider that the U.S. Central Bank (Federal Reserve Board) decided to
implement monetary policy to help the economy. In the LOE in the LR (market for
loanable funds), which curve shifts and to which direction? Show the change
redrawing the diagram from a)
c. Now, consider that the U.S. government (President and Congress) decided to
implement fiscal policy to help the economy. In the LOE in the LR, which curve
shifts and to which direction? Show the change redrawing the diagram from b)
d. Which policy is more effective in the long run?
e. Optional question: what do you think would happen to the market for foreign
currency in the LR without the central bank or government intervention? And with
their intervention?

Purchase answer to see full
attachment