Question 1

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services."

a. In the $I S - L M$ model, will a tax cut change the money supply in the economy? Does a change in the money supply shift the $I S$ or the $L M$ curve?
b. In the $I S - L M$ model, does a tax cut shitt the $I S$ or the $L M$ curve?
c. Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the $I S - L M$ model?

Accepted Answer

The answer of In explaining the 2003 bill to cut...

Question 2

a. Suppose Congress decides to reduce the budget deficit by cutting government spending. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label:
i. the axes
ii. the curves
iii. the initial equilibrium values 
iv. the direction the curve shifts
v. the terminal equilibrium values.

b. Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.

Accepted Answer

The answer of a. Suppose Congress decides to reduce the...

Question 3

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

Accepted Answer

The answer of Explain why a decrease in planned investment,...

Question 4

Of the following comments related to equilibrium level in an IS-LM model, which best denotes the logical causality, and why?

A. The goods and services market as denoted by IS curve gives an equilibrium level of Y, which when posited in the LM curve gives the equilibrium level of r.

B. The goods and services market as denoted by the IS curve gives an interest rate as a function of Y which helps solve for equilibrium in the money market.

C. The equilibrium rate of interest as determined by the demand for real balances for a given level of money supply in the money market helps determine the equilibrium level of investment that finally helps reach an equilibrium level of income.

Accepted Answer

The answer of Of the following comments related to equilibrium...

Question 5

The IS-LM model simultaneously determines equilibrium in two markets.

a. Which two markets?
b. What two variables adjust to bring equilibrium in the markets?

Accepted Answer

The answer of The IS-LM model simultaneously determines equilibrium in...

Question 6

a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income. Be sure to label: 
i. the axes
ii. the curves
iii. the initial equilibrium values 
iv. the direction the curve shifts 
v. the terminal equilibrium values

b. Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

Accepted Answer

The answer of a. Use the Keynesian-cross model to illustrate...

Question 7

Use the following to answer question : 
-The above figure is a basic representation of the Keynesian cross. Just by looking at the graph, deduce the fundamental prerequisite condition for the Keynesian-cross model to hold true.

Accepted Answer

The answer of Use the following to answer question :...

Question 8

a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: 
i. the axes
ii. the curves
iii. the initial equilibrium values
iv. the direction the curve shifis
v. the terminal equilibrium values.

b. Explain in words what happens to the equilibrium interest rate as a result of the open-market purchase.

Accepted Answer

The answer of a. Graphically illustrate the impact of an...

Question 9

Explain what force moves the market back to equilibrium if the market is initially in disequilibrium in:

a. the market for goods and services;
b. the market for real money balances.

Accepted Answer

The answer of Explain what force moves the market back...

Question 10

a.  As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure fo label: 
i. the axes 
ii. the curves
iii. the initial equilibrivm values 
iv. the direction the curve shifts 
v. the terminal equilibrium values

b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

Accepted Answer

The answer of a.  As an economy moves into...

Question 11

a. Graphically illustrate how an increase in income affects the equilibrium levels of saving, investment, and the interest rate in the loanable funds model. Be sure to label: 
i. the axes 
ii. the curves 
iii. the initial equilibrinm values 
iv. the direction the curve shifts
v. the terminal equilibrium values.

b. Explain in words what happens to the equilibrium levels of saving, investment, and the interest rates as a result of the increase in income.

Accepted Answer

The answer of a. Graphically illustrate how an increase in...

Question 12

Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.9 in each country. Country A decides to increase spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater?

Accepted Answer

The answer of Two identical countries, Country A and Country...

Question 13

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800.

a. Write the $L M$ curve two ways, expressing $Y$ as a function of $r$ and $r$ as a function of $Y$. (Hint: $W$ rite the $L M$ curve only relating $Y$ and $r$, substitute out $M P$.)
b. What is the slope of the $L M$ curve?
c. If $r$ is 1 percent, what is $Y$ al ong the $L M$ curve? If $r$ is 3 percent, what is $Y$ al ong the $L M$ curve? If $r$ is 5 percent, what is $Y$ al ong the $L M$ curve?
d. If $M / P$ increases, does the $L M$ curve shift upward and to the left or downward and to the right?
e. If $M$ increases and $P$ is constant, does the $L M$ curve shift upward and to the left or downward and to the right?
f. If $P$ increases and $M$ is constant, does the $L M$ curve shift upward and to the left or downward and to the right?

Accepted Answer

The answer of Assume that the equilibrium in the money...

Question 14

Use the following to answer question : -The above diagram shows how a rise in government expenditure (G) shifts the IS curve from IS₁ to IS₂. What are the levels of investments in Y₁ and Y₂?

Accepted Answer

The answer of Use the following to answer question :...

Question 15

a. The interest rate affects which variable in: (1) the market for goods and services and (2) the market for real money balances?

b. The level of income affects which variable in: (1) the market for goods and services and (2) the market for real money balances?

Accepted Answer

The answer of a. The interest rate affects which variable...

Question 16

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

Accepted Answer

The answer of Explain why an increase in the money...

Question 17

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Accepted Answer

The answer of Compare the predicted impact of an increase...

Question 18

How can the government expenditure multiplier be reinterpreted in terms of savings?

Accepted Answer

The answer of How can the government expenditure multiplier be...

Question 19

During a recession, consumers may want to save more to provide themselves with a reserve to cushion possible job losses. Use the Keynesian model to describe the impact of an exogenous decrease in consumption (a decrease in
C) on the equilibrium level of income in the economy. Will aggregate national saving increase?

Accepted Answer

The answer of During a recession, consumers may want to...

Question 20

a. Suppose Congress passes legislation that significantly reduces taxes. Use the Keynesian- cross madel to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income. Be sure to label: 
i. the axes 
ii. the curves 
iii. the initial equilibrivm values
iv. the direction the curve shifts
v. the terminal equilibrium values.

b. Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

Accepted Answer

The answer of a. Suppose Congress passes legislation that significantly...

Quiz 11: Aggregate Demand I: Building the Is-Lm Model

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets? b. What two variables adjust to bring equilibrium in the markets?

Use the following to answer question : -The above figure is a basic representation of the Keynesian cross. Just by looking at the graph, deduce the fundamental prerequisite condition for the Keynesian-cross model to hold true.

Explain what force moves the market back to equilibrium if the market is initially in disequilibrium in: a. the market for goods and services; b. the market for real money balances.

Use the following to answer question : -The above diagram shows how a rise in government expenditure (G) shifts the IS curve from IS1 to IS2. What are the levels of investments in Y1 and Y2?

a. The interest rate affects which variable in: (1) the market for goods and services and (2) the market for real money balances? b. The level of income affects which variable in: (1) the market for goods and services and (2) the market for real money balances?

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

How can the government expenditure multiplier be reinterpreted in terms of savings?

Use the following to answer question : -The above diagram shows how a rise in government expenditure (G) shifts the IS curve from IS₁ to IS₂. What are the levels of investments in Y₁ and Y₂?