Economics

What determines the function of AD

(M/P)

Assuming that there is a tax cut(i.e. a decrease in T) to stimulate the economy, According to the traditional view from IS-LM model, What is the impact of the tax cut on output Y and interest rate r in the Short Run

A decrease in T promotes consumption, which shifts the IS curve to the right that results in higher output Y and higher interest rate r

What is the IS curve?

A downward sloping curve that describes the negative relationship between interest rate and output in GOODS MARKET

What is the LM curve?

A upward sloping curve that describes the positive relationship between interest rate and money in MONEY MARKET.

Aggregate Demand in the Long Run

An increase in the money supply shifts the AD curve to the right

'Full employment' assumed in AS-AD model

From chapter 10. It refers to the case of long-run equilibrium so that people who want to have a job had a job

What would be the effect of an increase in money supply on aggregate output Y and P in short run or in long run?

If M increase, then in the short-run, Y increases but P remains constant If M increase, then in the long-run, P increases but Y remains constant

IMF report in August , 2018, the debt to GDP ratio is highly likely to

Increase in the next five years

In the AS-AD model What is the shape of LRAS and why it is shaped in this way

It is vertical In the long run, the output will not be changing due to price flexibility

Who is the 'father' of short-run economy analysis, including the model of AS-AD or ISLM model?

John Keynes

Price Sticky

Key assumption made to distinguish the difference between the short-run and long run economy

business cycle

Key macroeconomic variables that fluctuate around their annual growth rate

investment in the US volatile more or less

More! Three-times more Consumption smoothing

Problem of Ricardian Equivalence in the short run

Myopia Borrowing constraints Future Generation

difference between recession and Depression

Recession means any down-turn economy . Depression means the 1929-1940 event

index of leading economic indicator and what is it used for

Refer you to read Ch.10 slides. Shortly speaking, they are indexes used for predicting future economic situation

Parties that own the higher share of the US Debt

The US investor

What is MPC (marginal propensity of consumption

The amount of your income that goes to consumption for every one dollar you earn

The equilibrium level of Y and r in an IS-LM model also indicates the equilibrium of which market(s)?

The equilibrium in an IS-LM model indicates the equilibrium of both goods market and money markets

Assuming that there is a debt-financed cut(decrease in T) to stimulate an economy. According to the Ricardian Equivalence, what is the impact of the tax cut on the output Y and interest rate r in the short run

The impact of the tax cut is neutral on Y and r, since forward looking consumers will save the full tax cut in order to repay the future tax liability

Evidence that exists against Richardian Equivalence in the short run

Yes, since one study that the tax cut by George H.W. Bush in 1992 in fact leas to 43% consumption rather than savings

Okun's Law

a. In the short-run, the higher GDP, the lower unemployment rate

What is the key difference between IS and LM curve?

a. The market is different