Exam 12: The Determination of Aggregate Output, the Price Level, and the Interest Rate

Discuss the impact of an increase in the money supply upon the goods and money markets. What most importantly determines the effectiveness of monetary policy?

Table 27.1 -Use the Table 27.1 to answer the following question. Suppose the expenditure multiplier is 5 and the initial interest rate is 12%. Where will the interest rate have to move to in order to cause equilibrium output to fall by 400 billion?

Would each of the following cause planned investment to increase or decrease? (a) Owners of firms become more optimistic about their future sales. (b) The degree of utilization of a firm's capital stock is very low. (c) The cost of capital relative to the cost of labor increases.

Explain what is meant by a contractionary fiscal policy.

Briefly explain what type of policy mix existed in the United States in 1980-82. What effect did this policy mix have on the interest rate and investment?

Describe expansionary fiscal policy.

Explain the real wealth effect.

Explain the consumption link as it relates to the shape of the aggregate demand curve.

Explain the chain of events that results from an expansionary monetary policy. Explain your answer in terms of its impact on money supply, aggregate output, the demand for money, the interest rate and planned investment. Be sure to include any feedback effects in your answer.

Scenario 1 Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate. -Using Scenario 1, if the interest rate were 10%, calculate the level of investment.

Draw the IS curve and explain its shape.

Graphically illustrate and explain the effects of a reduction in the money supply on the equilibrium interest rate, investment, and equilibrium output. Clearly label all curves and the initial and final equilibria.

Table 27.1 -Use the Table 27.1 to answer the following question.. Suppose the expenditure multiplier is 3. What impact on equilibrium output will there be by an increase in the interest rate from 6% to 9%, ceteris paribus?

How can monetary policy be used to reduce the impact of the crowding-out effect?

Using short-hand symbols, explain the effects of a contractionary fiscal policy.

Show the impact on the IS curve of an increase in government spending. Make sure to draw in the LM curve as well and illustrate the impact on the equilibrium interest rate and the aggregate output level.

Explain what is meant by the "mix of macroeconomic policy" and explain how it can affect the level and composition of output (i.e., GDP).

Describe in broad terms what the money market is.

Summarize the effects of a contractionary fiscal policy where the changes in government spending (G) and/or taxes (T) are changes upon output and income (Y), the demand for money (Md), the rate of interest (r), and investment spending (I).

Summarize the effects of a contractionary monetary policy where the changes in the money supply (Ms) impacts the rate of interest (r), investment spending (I), output and income (Y), and the demand for money (Md).