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

Table 27.1 -Use the Table 27.1 to answer the following question. Suppose the expenditure multiplier is 4. What will be the impact on equilibrium output of a drop in the interest rate from 15% to 9%, ceteris paribus?

Discuss the effects of a policy mix of an expansionary fiscal policy and an expansionary monetary policy on output and interest rates. Is there any ambiguity with regard to the effect on interest rates and why?

-Assume investment demand is independent of the interest rate. Explain why an expansionary monetary policy designed to drive the interest rate to zero may not be enough to stimulate the economy.

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

Draw the IS and LM curve on one graph. Explain the significance of the point of intersection of these two functions.

Using the short-hand symbols Ms, r, I, Y, and Md, demonstrate the effects of an expansionary monetary policy.

Show the impact on the LM curve of an increase in the money supply. Make sure to draw the IS curve and illustrate the impact on the equilibrium interest rate and aggregate output.

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?

Why is there a negative relationship between the interest rate and the level of investment?

Explain when fiscal policy is more effective in changing equilibrium output.

Explain the only circumstance in which expansionary monetary policy is likely to be effective. Hint: Use the linkage between the interest rate and investment spending to explain your answer.

Table 27.1 -Use the Table 27.1 to answer the following question. What will be the change in investment spending if the interest rate falls from 9% to 6%?

Draw a planned investment curve as it relates to the interest rate.

What will be the impact on money demand, the interest rate and the level of planned investment if the government increases spending?

How does monetary policy affect the goods market?

Describe the sequence of events that occurs in response to an expansionary monetary policy. Explain in terms of the impact on aggregate output, money demand, interest rates and planned investment.

Explain why the effectiveness of an expansionary monetary policy in increasing aggregate output is partially dependent on the interest sensitivity of the demand for money.

In deriving a demand curve for an individual product we invoke the ceteris paribus assumption which includes among other things that income remains fixed. Why can't we use that assumption when it comes to deriving the aggregate demand curve?

What would be the policy mix that would cause the interest rate to increase, and investment to decrease but have an indeterminate effect on aggregate output?

Figure 27.1 -Use Figure 27.1 above to answer the following question. Assume that the aggregate expenditure function depicted in the graph is based on an interest rate of 3%. Now assume that the interest rate rises to let's say 6%. Graphically illustrate the impact that this will have on the aggregate expenditure function and equilibrium output. Explain your answer.