MACRO FINAL

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 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

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

500

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

300

In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward

A decrease in the price level shifts the _________ curve to the right, and the aggregate demand curve _______________

LM; does not shift

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ______ real money supply M / P, which ______ the interest rate and ______ spending.

Lower; raises; reduces

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Y = 1,100 r = 6 percent

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:

Y = 1600 - 3T - 100r + 4G