Exam 12: Aggregate Demand Ii: Applying the Is-Lm Model

Compare the impact of a tax cut on consumption, investment, output, and interest rates in the classical model of Chapter 3 versus the IS-LM model.

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

Assume that an economy is characterized by the following equations: C = 100 + (2/3)(Y - T) T = 600 G = 500 I = 800 - (50/3)r M^s/P = M^d/P = 0.5Y - 50r a. Write the numerical $I S$ curve for the economy, expressing $Y$ as a numerical function of $G , T$ , and $r$ . b. Write the numerical $L M$ curve for this economy, expressing $r$ as a function of $Y$ and $M / P$ . c. Solve for the equilibrium values of $Y$ and $r$ , assuming $P = 1.0$ and $M = 1,200$ . How do they change when $P = 2.0$ ? Check by computing $C , I$ , and $G$ . d. Write the numerical aggregate demand curve for this economy, expressing $Y$ as a function of $G , T$ , and $M / P$ .

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

Assume that the economy is initially in short-run equilibrium at a level of output above the natural rate. Use the IS-LM model to illustrate graphically how the levels of income and interest rates change as the economy returns to the natural rate of output in the long run.

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

A change in income in the IS-LM model for a fixed price

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

The spending hypothesis suggests that the Great Depression was caused by a:

Use the IS-LM model to illustrate graphically the impact of the Pigou effect on the equilibrium level of income and interest rate during the Great Depression, when prices were falling.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.