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

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Assume the following model of the economy, with the price level fixed at 1.0: C=0.8(Y-T) T=1,000 I=800-20r G=1,000 Y=C+I+G M/P=M/P=0.4Y-40r M=1,200 a. Write a numerical formul a for the $I S$ curve, showing $Y$ as a function of $r$ alone. (Hint: Substitute out $C , L , G$ , and $T$ .) b. Write a numerical formula for the $L M$ curve, showing $Y$ as a function of $r$ alone. (Hint: Substitute out $M A P$ .) c. What are the short-tun equilibrium values of $Y , r , Y - T , C , I$ , private saving, public saving, and nati onal saving? Check by ensuring that $C + I + G = Y$ and national saving equals $l$ . d. Assume that $G$ increases by 200 . By how much will $Y$ increase in short-tun equilibrium? What is the government-purchases multiplier (the change in $Y$ divided by the change in $G$ )? e. Assume that $G$ is back at its original level of 1,000 , but $M M ^ { 5 }$ (the money supply) increases by 200. By how much will $Y$ increase in short-run equilibrium? What is the multiplier for money supply (the change in $Y$ divided by the change in $M F$ )?

If investment does not depend on the interest rate, then the ______ curve is ______.

An increase in taxes lowers income:

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

Other things equal, a given change in government spending has a larger effect on demand the:

An unexpected deflation can change demand by redistributing wealth from:

To stabilize falling prices in 1930, what did Pigou suggest?

Suppose Congress passes legislation that reduces taxes. Use the IS-LM model to illustrate graphically the impact of the tax reduction on output and interest rates. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.

Use the following to answer questions Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output.

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve.

In the IS-LM model, changes in taxes initially affect planned expenditures through:

An increase in money supply shifts the LM curve to the right, but an increase in money demand shifts the LM curve to the left. Explain why there is a difference.

If inflation is bad, why isn't deflation good? Use the IS-LM model to explain how deflation could result in a contraction in output.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift:

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.