ECON 315 Macroeconomic theory HW #2 part 1

If the money supply increases, then in the IS-LM analysis the ____ curve shifts to the ____.

LM; right

An increase in investment demand for any given level of income and interest rates--due, for example, to more optimistic "animal spirits" -- will, within the IS-LM framework, ____output and ____interest rates.

increase; raise

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in 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 model when government spending rises, in short-run equilibrium, in the usual case the interest rate ____ and output ____.

rises; rises

If MPC= 0.75, when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must _____ the money supply.

increase

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

(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 the interest rate constant, the Federal Reserve should ____ the money supply shifting to ____.

increase, LM2

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramification in the money market, because the increase in income causes a(n) ____ in money ____.

increase; demand

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

The increase in income in response to a fiscal expansion in the IS-LM is:

less than in the Keynesian-cross model unless the LM curve is horizontal.

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to _____ income and a ____ interest rate.

lower; lower

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates.

lower; raise

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a increase in government spending would generate the new equilibrium combination of interest rate and income:

r2, Y3

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2, Y3

(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 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be ____.

r2, Y3

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2

(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 ____ he money supply shifting to ____.

decrease, LM3