III. [Q13-Q16]
Go back to [BOX 1], and add two extra assumptions: The consumption function: C = 0.75(Y-T) [M/P 1], 0. Emunistan is currently in the liquidity trap, so the current IS curve intersectwith the flat portion of the LM curve. Answer the following Qs with reference to [FIGURE 3] below.
[FIGURE 3]
[Q13-Q14] Suppose that is 0.13.
[True/False] The fall in the price level from P0 to P1 fails to increase theaggregate purchase.
14. [True/False] Therefore, the AD curve is vertical passing through the two points 0 and A.
[Q15-Q17] Suppose that > 0.15.
[True/False] The fall in the price level from P0 to P1 shifts the IS curve out.
16. [True/False] Passing through the two points 0 and B, the AD curve becomes flatter (than with = 0).
17. If =5, what is the (common) value of Y in the boxes?
[FIGURE 3] Republic of Emunistan has the following features in [BOX 1] below:
[BOX 1] It is at the initial LR eq’m with ( P0,Y0,r0,M0 ), where
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