FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

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

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 41

Multiple Choice

Review LaterAdd Note

Review Later

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases, but by less than 250.

E) C) and D)
F) B) and C)

Correct Answer

verified

Show Answer

Question 42

Multiple Choice

Review LaterAdd Note

Review Later

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

A) $1 billion; more than $1 billion
B) $0.75 billion; more than $0.75 billion
C) $0.75 billion; $0.75 billion
D) $1 billion; $1 billion

E) B) and D)
F) B) and C)

Correct Answer

verified

Show Answer

Question 43

Essay

Review LaterAdd Note

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?

The IS curve generally determines:

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?

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of $\Delta$ T will:

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

For the purposes of the Keynesian cross, planned expenditure consists of:

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

The IS-LM model takes ______ as exogenous.

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?

An increase in the interest rate:

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?

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.

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

A falling investment function yields a falling IS curve, but a falling demand for real money balance curve yields a rising LM curve. Why?

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

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.

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: