Exam 9: The Is-Lmad-As Model

Desired consumption is C^d = 2000 + 0.9Y - 100,000r - G,and desired investment is I^d = 1000 - 45,000r.Real money demand is M^d/P = Y - 6000i.Other variables are π^e = 0.03,G = 500, $\bar{\gamma}$ = 1000,and M = 2100. (a)Find the equilibrium values of the real interest rate,consumption,investment,and the price level. (b)Suppose government purchases decline to 400.What happens to the variables listed in part (a)? (c)Suppose government purchases rise to 600.What happens to the variables listed in part (a)? (d)What feature in this example leads to the result that you don't need to know the amount of taxes collected by the government to find the equilibrium?

The short-run aggregate supply curve (in the absence of misperceptions)

The FE line

An adverse supply shock would cause the FE line to

Suppose the intersection of the IS and LM curves is to the right of the FE line.An increase in the price level would most likely eliminate a disequilibrium among the asset,labor,and goods markets by

A temporary supply shock,such as a bumper crop,would

A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A change that increases the real money supply relative to real money demand causes

An increase in investment spending would cause the FE line to

Which of the following changes shifts the AD curve down and to the left?

An increase in the effective tax rate on capital would cause the IS curve to ________ and the LM curve to ________.

The FE line is vertical because the level of output at full employment doesn't depend on the

Describe the differences between classical and Keynesian economists in terms of their views about monetary neutrality.

For each of the following changes,which equilibrium curve (IS,LM,or FE)is shifted? Draw the change in the underlying demand or supply curves (for example,money demand and supply for the LM curve)and show how the equilibrium curve changes. (a)Expected inflation increases. (b)The future marginal productivity of capital increases. (c)Labor supply decreases. (d)Future income declines. (e)There's a temporary beneficial supply shock. (f)The nominal interest rate on money rises.

Which of the following would shift the FE line to the left?

Draw a saving-investment diagram to show how each of the following changes shifts the IS curve. (a)Future income rises. (b)The future marginal productivity of capital increases. (c)Government purchases decrease temporarily. (d)The effective corporate tax rate increases.

Classical economists believe that in the short run

Classical economists think general equilibrium is attained relatively quickly because

At a given output level,a temporary reduction in government purchases will

Oil prices have risen temporarily,due to political uncertainty in the Middle East.An advisor to the Fed suggests,"Higher oil prices reduce aggregate demand.To offset this we must increase the money supply.Then the price level won't need to adjust to restore equilibrium,and we'll prevent a recession." Analyze this statement using the IS-LM model.