Question 1

If the central bank of an economy follows a policy of interest rate targeting,or maintaining a fixed interest rate,then what will happen to the slope of the LM curve? Draw a graph to illustrate.

Accepted Answer

The LM curve will be flat at the interest rate the central bank chooses to target,meaning that income will have to make the full adjustment for any change in the IS curve.

Question 2

What happens to inventories on all points that are below the IS curve? Are unplanned inventories positive or negative? Explain.

Accepted Answer

Below the IS curve,for a given interest rate income is lower than equilibrium income.As a result,unplanned inventories would be positive.

Question 3

If the consumption function is given by C = 200 + 0.6Y_D,then an increase in taxes of 50 units will cause the IS schedule to

Accepted Answer

An increase in taxes reduces disposable income (YD), which in turn reduces consumption (C). Given the consumption function C = 200 + 0.6YD, a 50-unit increase in taxes decreases YD by 50 units, leading to a decrease in consumption by 0.6 * 50 = 30 units. This reduction in consumption decreases aggregate demand, causing the IS schedule to shift to the left. However, the correct magnitude of the shift isn't directly given by the change in consumption alone. The question seems to imply a multiplier effect that isn't directly calculable from the provided information. The correct answer, based on the options given and typical interpretations of such economic models, would involve recognizing the indirect effects on investment and output, but without additional context or a clear multiplier, the direct application of the consumption change to the IS shift isn't straightforward. The choice provided might be based on a misunderstanding or a typo in the question.

Question 4

Keynes considered three motives for holding money.Which of these was similar to the classical quantity theory of money demand? Which is unique to Keynesian theory?

Accepted Answer

The answer of Keynes considered three motives for holding money.Which...

Question 5

A decline in the money stock will

Accepted Answer

The answer of A decline in the money stock will
...

Question 6

In the Keynesian theory,an exogenous decrease in the demand for money shifts

Accepted Answer

In the Keynesian theory, an exogenous decrease in the demand for money results in an increase in investment and consumption. This upward pressure on goods and services demand shifts the IS curve to the right. However, the decrease in money demand also implies a higher money supply, which lowers interest rates, thereby increasing investment and output. This effect shifts the LM curve to the right. As a result of both effects, the LM curve shifts to the right and the IS curve to the right, but the former shift is smaller than the latter, resulting in a net leftward shift of the LM curve- hence option B.

Question 7

Suppose that the money supply in addition to money demand increases when the interest rate increases.How do you think this change from the basic Keynesian money market would affect the slope of the LM curve? Draw a graph to illustrate.

Accepted Answer

The answer of Suppose that the money supply in addition...

Question 8

If people increase their expected rate of interest,the speculative demand for money curve will _____ and money supply will _____.

Accepted Answer

When people increase their expected rate of interest, the speculative demand for money decreases because they prefer to invest in bonds or other interest-bearing assets rather than holding money. This causes the speculative demand for money curve to shift downward. The money supply, determined by the central bank or monetary authority, remains unchanged by changes in the speculative demand for money.

Question 9

Suppose that there is an unexpected increase in the demand for money at every level of interest rates and income.What happens to equilibrium interest rates and income as a result? Provide an IS/LM curve to illustrate.

Accepted Answer

The answer of Suppose that there is an unexpected increase...

Question 10

Assume that following equations describe the money market of an economy

Accepted Answer

The answer of Assume that following equations describe the money...

Question 11

What is meant by a "liquidity trap?"

Accepted Answer

The answer of What is meant by a "liquidity trap?"...

Question 12

If the consumption function is given by C = 100 + 0.75(Y-T),then an increase of 10 units in taxes will cause the IS schedule to shift to the right by

Accepted Answer

An increase in taxes (T) by 10 units would decrease disposable income (Y-T) by 10 units. Given the marginal propensity to consume (MPC) is 0.75, consumption (C) would decrease by 0.75 * 10 = 7.5 units. However, the IS curve represents equilibrium in the goods market, where investment equals savings. A decrease in consumption due to higher taxes would reduce aggregate demand, shifting the IS curve to the left, not the right. The options provided do not directly correlate to the standard IS curve shift due to a tax increase in terms of units. The closest option, given the misunderstanding in the question's phrasing about the direction of the shift, is -30 units, assuming a misinterpretation of the impact magnitude.

Question 13

Compare and contrast the effects of an increase in the money supply on interest rates within the Keynesian and Classical model.Provide graphs to illustrate.Discuss why the results differ between these models.

Accepted Answer

The answer of Compare and contrast the effects of an...

Question 14

A fall in autonomous investment will shift the

Accepted Answer

A fall in autonomous investment would shift the IS curve to the left, leading to lower output and potentially higher interest rates. However, none of the provided options accurately describe this scenario. Option A incorrectly suggests a rightward shift. Option B refers to the LM curve, which is affected by changes in money supply and demand, not investment. Option C incorrectly suggests a shift towards higher output. Therefore, none of the given choices correctly describe the effect of a fall in autonomous investment on the IS curve.

Question 15

Assume the following equations describe the goods market of an economy
	C = 250 + .8(Y-T)
	I = 100 - 50r
	T = G = 100.
Calculate the IS curve for this economy. If G rises to 120, calculate the new IS curve for this economy. How much and in what direction has the IS curve shifted?	
The IS curve is Y = 1850 - 250r before and Y = 1950 - 250r after. The IS curve has shifted up by 100 units.

Accepted Answer

The answer of Assume the following equations describe the goods...

Question 16

Assume that the government passes a deficit-financed tax cut.If the central bank would like to keep interest rates constant,what monetary policy should they follow? Provide an IS/LM graph to illustrate.

Accepted Answer

The answer of Assume that the government passes a deficit-financed...

Question 17

List three changes in exogenous variables that would shift the IS curve to the right.

Accepted Answer

The answer of List three changes in exogenous variables that...

Question 18

Household consumption likely depends upon accumulated wealth and not just current income as it does in the basic Keynesian model examined in this chapter.How would the IS/LM model respond to a decline in housing prices,such as what occurred in the US during the 2008 global financial crisis,if consumption was a function of wealth.Provide a graph to illustrate.

Accepted Answer

The answer of Household consumption likely depends upon accumulated wealth...

Question 19

If savings becomes more interest rate elastic,what happens to the slope of the IS curve.Provide a graph to illustrate.

Accepted Answer

The answer of If savings becomes more interest rate elastic,what...

Question 20

In the Keynesian money market,velocity is

Accepted Answer

In the Keynesian money market, velocity is positively related to the interest rate because higher interest rates encourage people to hold less money and spend more, increasing the velocity of money.

Quiz 6: Keynesian System II: Money,interest,and Income

If the central bank of an economy follows a policy of interest rate targeting,or maintaining a fixed interest rate,then what will happen to the slope of the LM curve? Draw a graph to illustrate.

What happens to inventories on all points that are below the IS curve? Are unplanned inventories positive or negative? Explain.

If the consumption function is given by C = 200 + 0.6Y_D,then an increase in taxes of 50 units will cause the IS schedule to

Keynes considered three motives for holding money.Which of these was similar to the classical quantity theory of money demand? Which is unique to Keynesian theory?

A decline in the money stock will

In the Keynesian theory,an exogenous decrease in the demand for money shifts

Suppose that the money supply in addition to money demand increases when the interest rate increases.How do you think this change from the basic Keynesian money market would affect the slope of the LM curve? Draw a graph to illustrate.

If people increase their expected rate of interest,the speculative demand for money curve will _ and money supply will _.

Suppose that there is an unexpected increase in the demand for money at every level of interest rates and income.What happens to equilibrium interest rates and income as a result? Provide an IS/LM curve to illustrate.

Assume that following equations describe the money market of an economy

What is meant by a "liquidity trap?"

If the consumption function is given by C = 100 + 0.75(Y-T) ,then an increase of 10 units in taxes will cause the IS schedule to shift to the right by

Compare and contrast the effects of an increase in the money supply on interest rates within the Keynesian and Classical model.Provide graphs to illustrate.Discuss why the results differ between these models.

A fall in autonomous investment will shift the

Assume that the government passes a deficit-financed tax cut.If the central bank would like to keep interest rates constant,what monetary policy should they follow? Provide an IS/LM graph to illustrate.

List three changes in exogenous variables that would shift the IS curve to the right.

If savings becomes more interest rate elastic,what happens to the slope of the IS curve.Provide a graph to illustrate.

In the Keynesian money market,velocity is

Quiz 6: Keynesian System II: Money,interest,and Income

If the central bank of an economy follows a policy of interest rate targeting,or maintaining a fixed interest rate,then what will happen to the slope of the LM curve? Draw a graph to illustrate.

What happens to inventories on all points that are below the IS curve? Are unplanned inventories positive or negative? Explain.

If the consumption function is given by C = 200 + 0.6YD,then an increase in taxes of 50 units will cause the IS schedule to

Keynes considered three motives for holding money.Which of these was similar to the classical quantity theory of money demand? Which is unique to Keynesian theory?

A decline in the money stock will

In the Keynesian theory,an exogenous decrease in the demand for money shifts

Suppose that the money supply in addition to money demand increases when the interest rate increases.How do you think this change from the basic Keynesian money market would affect the slope of the LM curve? Draw a graph to illustrate.

If people increase their expected rate of interest,the speculative demand for money curve will _____ and money supply will _____.

Suppose that there is an unexpected increase in the demand for money at every level of interest rates and income.What happens to equilibrium interest rates and income as a result? Provide an IS/LM curve to illustrate.

Assume that following equations describe the money market of an economy

What is meant by a "liquidity trap?"

If the consumption function is given by C = 100 + 0.75(Y-T) ,then an increase of 10 units in taxes will cause the IS schedule to shift to the right by

Compare and contrast the effects of an increase in the money supply on interest rates within the Keynesian and Classical model.Provide graphs to illustrate.Discuss why the results differ between these models.

A fall in autonomous investment will shift the

Assume that the government passes a deficit-financed tax cut.If the central bank would like to keep interest rates constant,what monetary policy should they follow? Provide an IS/LM graph to illustrate.

List three changes in exogenous variables that would shift the IS curve to the right.

If savings becomes more interest rate elastic,what happens to the slope of the IS curve.Provide a graph to illustrate.

In the Keynesian money market,velocity is

If the consumption function is given by C = 200 + 0.6Y_D,then an increase in taxes of 50 units will cause the IS schedule to

If people increase their expected rate of interest,the speculative demand for money curve will _ and money supply will _.