Exam 10: Explaining Aggregate Demand: the Is-Mp Model

Other things equal,when the real interest rate rises,C,I,and NX ________ and real GDP will ________ relative to potential GDP.

Suppose the economy is initially in equilibrium at potential GDP = $100 billion and investment increases by $8 billion.If the MPC in this economy is 0.8,what will happen to real GDP? Draw an aggregate expenditure graph showing this change in investment and real GDP.

Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant and the Bank of Canada wants to lower the inflation rate,the Bank of Canada could ________ the target short-term nominal interest rate,which will result in real GDP being ________ potential GDP.

Which of the following equations best represents the long-term real interest rate? The long-term real interest rate =

Assume the economy is initially in equilibrium where potential GDP is less than real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant,________ in the Bank of Canada's short-term nominal interest rate will shift the MP curve up,which will result in real GDP ________.

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3.A positive demand shock with no change in the real interest rate is best represented by ________ in panel (a)and ________ in panel (b).

Figure 10.2 -Refer to Figure 10.2..Assume the economy is initially at equilibrium at potential GDP of $250 billion.If the MPC = 0.50 and the difference between AE₁ and AE₂ represents a $75 billion decrease in planned investment spending,real GDP at Y₂ will be equal to

Table 10.1 Consurmpticn C=\ 1.0+0.75 Irvestmernt =\ 1.9 Goverument purchases =\ 2 Net exports =-\ 0.5 Taxes =\ 0 Goverument trarssfer gayments =\ 0 (all values are in billions of dollars) -Refer to Table 10.1.Suppose that all of the information given in the table remains the same except that taxes equal $0.5 billion.Equilibrium real GDP for this economy is equal to

Figure 10.7 -Refer to Figure 10.7.A movement from point A to point D could be caused by

Figure 10.7 -Refer to Figure 10.7.A movement from point C to point B could be caused by

Figure 10.7 -Refer to Figure 10.7.A movement from point D to point C could be caused by

Figure 10.7 -Refer to Figure 10.7..A movement from point B to point D could be caused by

Figure 10.7 -Refer to Figure 10.7.A movement from point A to point B could be caused by

Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant and the Bank of Canada wants to ________ the inflation rate,the Bank of Canada could lower the target short-term nominal interest rate,which will result in an output gap which is ________.

Suppose that the marginal propensity to consume is 0.75. a. If the government decreases spending by $500 billion,what is the change in output? b. If the government decreases taxes by $500 billion,what is the change in output? c. If the government decreases spending by $500 billion and at the same time decreases taxes by $500 billion,what is the change in output?

An increase in the price level causes a ________ the IS curve and a ________ the aggregate demand curve.

The IS curve shows the combinations of ________ and ________ where the goods market is in equilibrium.

Figure 10.4 -Refer to Figure 10.4...Suppose the economy's equilibrium starts out with an output gap of $\hat{Y}$ ₁,and real GDP increases so the output gap increases to $\hat{Y}$ ₂.If the Bank of Canada acts to keep the short-term nominal interest rate at the target and the term structure effect,the default-risk premium,and the expected inflation rate remain constant,then the long-term nominal interest rate will

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₂,firms will ________ production until equilibrium is reached at ________.

If the Bank of Canada keeps the real interest rate constant,the recovery of a weak housing market would cause the ________,and the output gap would ________.