Exam 11: The Is Curve

Suppose we assume , and the real interest rate rises to ) In this scenario of the IS curve, the economy would, in the short run:

Suppose we assume , and the real interest rate falls to ) In this scenario of the IS curve, the economy would, in the short run:

Refer to the following figure when answering the following question. Figure 11.2: Growth Rates of Investment and GDP (Source: U.S. Bureau of Economic Analysis) -Consider Figure 11.2. How does the investment function describe why investment is more volatile than the GDP?

Agency problems occur when:

Refer to the following figure when answering the following questions. Figure 11.7: Life Cycle Hypothesis -Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________ is/are (a) period(s) of ________, and area(s) ________ is/are (a) period(s) of ________.

When the multiplier is included in the IS curve, a:

Over the past few years, the Chinese have bought billions of dollars of U.S. bonds, pushing down U.S. interest rates. From this, you conclude that:

Refer to the following figure when answering the following questions. Figure 11.4: IS Curve -In Figure 11.4, the economy deviates from its long-run equilibrium at point(s):

Refer to the following figure when answering the following questions. Figure 11.3: IS Curve -Consider Figure 11.3. If investment is interest rate sensitive, but not infinitely interest rate sensitive, the economy would be best characterized by:

Some economists, like Robert Barro and John Taylor, were skeptical about the effectiveness of the American Recovery and Reinvestment Act and cited ________ as the reason.

The permanent-income hypothesis suggests that people will base their consumption on their:

You hear that the Federal Reserve is raising interest rates. From this new information, you conclude that:

One problem with insurance is that it allows people to live in flood plains. This is an example of adverse selection.

Consider the following model of the IS curve without an international sector: Consumption: ; Investment: ; and Government expenditure: ) With this formulation the IS curve is:

In the IS curve , the term Is called:

Refer to the following figure when answering the following questions. Figure 11.1: Growth rates of real investment and consumption (Source: U.S. Bureau of Economic Analysis) -Consider Figure 11.1. What explains the difference in the volatility of each series?

Suppose the parameters of the IS curve are , and the real interest rate is initially . (a) Is the economy in its long-term equilibrium? Explain. (b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant? (c) What happens to the short-run equilibrium if falls 3 percent, holding everything else constant? (d) What occurs if the marginal product of capital rises to 5 percent, holding everything else constant? What would cause this to happen?

According to Ricardian equivalence, an increase in government expenditure without a proportional tax increase implies that households expect future tax increases and will reduce spending today.

In the IS curve is equal to:

Explain what happens to the macroeconomy in the short run in each of the following circumstances: (a) There is deep recession in Europe. (b) Housing values rise above their trend. (c) Mortgage lenders raise interest rates. (d) The government decides to close 20 percent of its military bases around the country. (e) The long-run interest rate rises.