Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020.
During March 2020, many states went into a lockdown and most people stopped shopping for goods and services out of fear and uncertainty. Using the IS-LM framework, graph the effect of this shock on the IS curve. What’s the impact on output and the interest rate?
At the same time, people concerned about the health of financial institutions, withdrew cash and held onto their funds instead of depositing them at banks. Using the IS-LM framework, graph the effect of this shock on the LM curve. What’s the impact on output and the interest rate?
Assume that we observed the interest rate fall. Which shock was more significant (larger), the one in (a) or (b)?
Graph the effects of the shocks in (a) and (b) on Aggregate Demand.
The government passed a fiscal stimulus package which increased government expenditures and reduced taxes. At the same time, the Fed increased money supply. Explain the effects of these interventions in the IS-LM framework and on Aggregate Demand. (which policy shifts which curve in what direction and what is the ultimate effect on AD?)
Using Mundell–Fleming model, what is the effect on the exchange rate of the shocks in a and b? Does the model predict that the dollar appreciates or depreciates?
Sample Solution
