MACROECONOMIC ANALYSIS

Macroeconomics: Theories and Policies, 9th ed., Richard T. Froyen, Prentice Hall, 2009

Chapter 7
1. Given the IS curve as drawn in class, the exclusive use of monetary policy will eventually lead to its becoming increasingly ineffective. Explain why monetary policy becomes less and less effective in each of the three ranges as discussed in class.
2. Given the LM curve as drawn in class, the exclusive use of fiscal policy will eventually lead to its becoming increasingly ineffective. Explain why fiscal policy becomes less and less effective in each of the three ranges as discussed in class.

Chapter 8
1. Using the IS-LM framework, explain the shape of the aggregate demand curve.
2. Increases in IS or LM will generate increases in income and output that are smaller when we incorporate the AD-AS model than when we just considered the IS-LM model in isolation. Explain why this would be the case.

Chapter 9
1. Why were early Keynesian economists so pessimistic about the effectiveness of monetary policy?
2. Show how the IS and LM curves look in the monetarist view. Use the IS and LM curves to illustrate, and explain, the monetarist conclusions about the relative effectiveness of monetary and fiscal policy?

Chapter 14
1. With a fixed exchange rate system, trade deficits put pressure on exchange rates to change. This is contrary to the concept of fixed exchange rates. Explain the actions that must be taken by both central banks to maintain the exchange rate. Explain the economic effects of these actions on both the importing and exporting nation.
2. Explain how flexible exchange rates limit the inflation and unemployment damage in an economy to the traded sectors. Give an example using a balance of payments deficit.