In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts down and to the left, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, what should the Fed do? Use the LR curve to formulate your answer.
14) Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.
15) In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts up and to the right, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, what should the Fed do? Use the LR curve to formulate your answer.
16) Suppose the Fed cares only about keeping the economy close to full-employment output. The Fed can target the real money supply (thus keeping the LM curve fixed) or it can target the real interest rate, changing the money supply and shifting the LM curve however is necessary to prevent a change in the real interest rate.
(a)Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why. Illustrate with a diagram.
(b)Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why. Illustrate with a diagram.
17) Use the LR curve to show what happens to output, the real interest rate, and the price level in the short run and in the long run if the government provides a tax credit to people who buy a new home, which leads to an increase in new housing
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