PT 3

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.

lowers; raises

The debt-deflation theory of the Great Depression suggests that an _____ deflation redistributes wealth in such a way as to _____ spending on goods and services.

unexpected; reduce

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:

both the LM and the IS curves.

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

consumer spending; IS

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

leftward shift in the LM curve.

(GRAPH) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level.

C; higher

Analysis of the short run and long run indicates that the _____ assumptions are most appropriate in _____.

Keynesian; the short run

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____.

LM; does not shift

(GRAPH) Based on the graph, which is the correct ordering of the price levels and money supplies?

P1 > P2 and M1 < M2

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):

contractionary shift in the IS curve.

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

debtors to creditors; smaller

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level.

decrease; LM

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.

movement along the; shift in the

Investment depends on the _____ interest rate, and money demand depends on the _____ interest rate.

real; nominal

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 _____.

resulting from a change in the price level; at a given price level