Question 1

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

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Question 2

During a recession, consumers may want to save more to provide themselves with a reserve to cushion possible job losses. Use the Keynesian model to describe the impact of an exogenous decrease in consumption (a decrease in C) on the equilibrium level of income in the economy. Will aggregate national saving increase?

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Question 3

Explain what force moves the market back to equilibrium if the market is initially in disequilibrium in:
a. the market for goods and services;
b. the market for real money balances.

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Question 4

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

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Question 5

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services."
a. In the IS-LM model, will a tax cut change the money supply in the economy? Does a change in the money supply shift the IS or the LM curve?
b. In the IS-LM model, does a tax cut shift the IS or the LM curve?
c. Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?

Accepted Answer

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Question 6

The IS-LM model simultaneously determines equilibrium in two markets.
a. Which two markets?
b. What two variables adjust to bring equilibrium in the markets?

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Question 7

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

Accepted Answer

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Quiz 11: Aggregate Demand II: Applying the Is-Lm Model

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Explain what force moves the market back to equilibrium if the market is initially in disequilibrium in: a. the market for goods and services; b. the market for real money balances.

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets? b. What two variables adjust to bring equilibrium in the markets?

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.