Exam 11: Aggregate Demand I: Building the Is-Lm Model

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

A falling investment function yields a falling IS curve, but a falling demand for real money balance curve yields a rising LM curve. Why?

The IS curve generally determines:

For the purposes of the Keynesian cross, planned expenditure consists of:

An increase in the interest rate:

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of $\Delta$ T will:

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

a. As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure fo label: i. the axes ii. the curves iii. the initial equilibrivm values iv. the direction the curve shifts v. the terminal equilibrium values b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets? b. What two variables adjust to bring equilibrium in the markets?

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services." a. In the $I S - L M$ model, will a tax cut change the money supply in the economy? Does a change in the money supply shift the $I S$ or the $L M$ curve? b. In the $I S - L M$ model, does a tax cut shitt the $I S$ or the $L M$ curve? c. Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the $I S - L M$ model?

Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.9 in each country. Country A decides to increase spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater?

a. The interest rate affects which variable in: (1) the market for goods and services and (2) the market for real money balances? b. The level of income affects which variable in: (1) the market for goods and services and (2) the market for real money balances?

Use the following to answer question : -The above figure is a basic representation of the Keynesian cross. Just by looking at the graph, deduce the fundamental prerequisite condition for the Keynesian-cross model to hold true.

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

The IS-LM model takes ______ as exogenous.