PT 2

An increase in income raises money _____ and _____ the equilibrium interest rate.

demand; raises

An increase in taxes shifts the IS curve:

downward and to the left.

The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes.

income

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

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2 billion; $8 billion

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2.25 billion; $9 billion

The IS and LM curves together generally determine:

both income and the interest rate.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

decreases; downward

The equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short run.

(GRAPH) In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

fall; increase

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

increase, but by less than 100

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income.

increases; increases

Planned expenditure is a function of:

national income and planned investment, government spending, and taxes.

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____.

national income; goods and services

Equilibrium levels of income and interest rates are _____ related in the goods and services market, and equilibrium levels of income and interest rates are _____ related in the market for real money balances.

negatively; positively

(GRAPH) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

r2, Y3.

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.

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.

(GRAPH) Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____.

sell; rise

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income