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

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 C $\hat{Y}$ ₂.If the Bank of Canada keeps the money supply constant,money demand will ________ and the nominal interest rate will ________.

Explain how an increase in the real interest rate,with no changes to other factors that affect aggregate expenditure,impacts aggregate expenditure and how this interest rate increase is shown on the IS curve.How would this change if there was a negative demand shock with no change in the real interest rate? Show both situations using graphs for aggregate expenditure and the IS curve.

Other things equal,when the real interest rate falls,C,I,and NX ________ and the output gap will ________.

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by

Contractionary monetary policy causes a ________ the MP curve and a ________ the aggregate demand curve.

Assume the long-term real interest rate is 4% and the expected inflation rate is 5%.If the Bank of Canada decreases the money supply and as a result,the expected inflation rate decreases to 2%,then based on the Fisher effect,the long-term real interest rate will ________ and the long-term nominal interest rate will ________.

Assume the economy is in a recession and the federal government decides to cut personal income tax rates.All else equal,the cut in tax rates should

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3...An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by ________ in panel (a)and ________ in panel (b).

If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ________,and the output gap would ________.

Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will ________ relative to potential GDP and the real interest rate will ________.

Assume the long-term nominal interest rate is 7% and the expected inflation rate is 3%.If the Bank of Canada increases the money supply and as a result,the expected inflation rate increases to 5%,then based on the Fisher effect,the long-term real interest rate will

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3..A negative demand shock accompanied by an increase in the real interest rate is best represented by ________ in panel (a)and ________ in panel (b).

Figure 10.5 -Refer to Figure 10.5.A shift from MP₁ to MP₃ will occur if

If the short-term nominal interest rate is 3.4%,the term structure effect is 1.2%,the default-risk premium is 1.4%,and the expected rate of inflation is 2.7%,the long-term real interest rate will be