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

An economic change that does not shift the aggregate demand curve is a change in:

The monetary transmission mechanism works through the effects of changes in the money supply on:

Under what condition does a liquidity trap occur?

a. An economy is initially a the natural level of output. There is an increase in government spending. Use the LS—LM model to illustrate both the short-run and long-run impact of this policy change. Be sure to label: i. the axes ii. the curves iii. the initial equilibrium iv. the short-run equilibrium v. the terminal eqilibrium b. Explain in words the short-run and long-run impact of the change in government spending on output and interest rates.

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.

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

Most economists believe:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)^d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

If money demand does not depend on income, then the ______ curve is ______.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.

Use the following to answer questions : Exhibit: Policy Interaction -(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____.

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

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

Use the IS-LM model to predict the short-run impact on the interest rate and output if the Fed pushes interest rates down at the same time that both consumption and investment fall due to a financial crisis. Illustrate your answer graphically. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium; and iv. the direction the curves shift. Explain your answer in words.

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: