Exam 10: Aggregate Demand I

Assume that the money demand function is (M/P)^d = 2,200 - 200r,where r is the interest rate in percent.The money supply M is 2,000 and the price level P is 2.If the price level is fixed and the Bank of Canada wants to fix the interest rate at 7 percent,it should set the money supply at:

In explaining his 2003 bill to cut taxes,President Bush of the United States said "When people have more money,they can spend it on goods and services." a.In the IS-LM model,will a tax cut change the money supply in the economy? Does a change in the money supply shift the IS or the LM curve? b.In the IS-LM model,does a tax cut shift the IS or the LM 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 IS-LM model?

The interest rate is a determinant of ______ in the goods market and money ______ in the money market.

The IS curve may be interpreted as showing the:

Use the following to answer questions : Exhibit: Keynesian Cross -(Exhibit: Keynesian Cross)In this graph,the equilibrium levels of income and expenditure are:

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

a.The interest rate affects which variable in the market for goods and services versus the market for real money balances? b.The level of income affects which variable in the market for goods and services versus the market for real money balances?

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

When the central bank tightens the money supply:

If investment demand is infinite below some certain r (e.g.,r**)and zero above r**,then the IS curve is ______ and ______ policy has no effect on output.

The basic IS-LM model takes ______ as exogenous.

The theory of liquidity preference implies that,other things being equal,an increase in the real money supply will:

Reducing the money supply ______ nominal interest rates in the short run,and ______ nominal interest rates in the long run.

In the Keynesian-cross model,fiscal policy has a multiplied effect on income because fiscal policy:

According to the quantity equation,if velocity is not assumed to be constant and the money supply is held constant,then an increase in the interest rate ______ velocity and ______ income.

Use the following to answer questions : Exhibit: Market for Real Money Balances -(Exhibit: Market for Real Money Balances)Based on the graph,if the interest rate is r₃,then people will ______ bonds and the interest rate will ______.

With the real money supply held constant,the theory of liquidity preference implies that a higher income level will be consistent with:

In the Keynesian-cross model,if the MPC equals .75,then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

In the basic Keynesian cross analysis,planned expenditure consists of:

An LM curve shows combinations of: