Quiz 14
If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:
400
If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:
300
In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):
decrease in both output and the nominal interest rate.
In the IS- LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.
decrease; decrease; decrease; decrease
The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:
investment is not affected by the interest rate whereas in the IS- LM model fiscal expansion raises the interest rate and crowds out investment.
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.
less than
Based on the figure below, starting from equilibrium at interest rate r1 and income Y1, expansionary fiscal policy would generate the new equilibrium combination of interest rate and income:
r2, Y3
Based on the figure in question 2 above, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income:
r3, Y3
In the IS -LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.
sell; rises; decrease
Based on the figure below, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant:
the aggregate demand curve will shift to the left.