CAS EC 202 Lecture Notes - Lecture 12: Stock Market Crash, Monetary Policy, Fiscal Policy

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30 Nov 2017

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Is curve shifts right by [1/(1-mpc)]* g causing output & income to rise: this raises money demand, causing the interest rate to rise , which reduces investment, so the final increase in y is smaller than [1/(1-mpc)]* g. A tax cut: consumers save (1-mpc) of the tax cut, so the initial boost in spending is smaller for t than for an equal g and the is curve shifts by: So the effects on r and y are smaller for t and for an equal g. Monetary policy: an increase in m: m > 0 shifts the lm curve down (or to the right) Which increases investment, causing output & income to rise. Is shifts left, causing r and y to fall: c falls due to lower wealth and lower income, u rises because y is lower (okun"s law) Intuition for slope of ad curve: (cid:313)p (cid:314) (cid:315)(m/p) (cid:314) lm shifts left.

Related Questions

11. Statement 1: The multiplier for autonomous consumption, I and G are different given a specific value of MPC.

Statement 2: The lumpsum tax multiplier is always the G multiplier times the MPC.

a)Statement 1 is true, Statement 2 is true.

b)Statement 1 is true, Statement 2 is false.

c)Statement 1 is false, Statement 2 is true.

d)Statement 1 is false, Statement 2 is false.

12. Pick the correct statement

a)Every point on the IS curve corresponds to an equilibrium value of Y, for a given value of r.

b)Every point on the IS curve corresponds to an equilibrium in the commodity market.

c)Both (a) and (b)

d)None of the above

13. Increase in real money supply

a)Shifts the IS curve to the right

b)Shifts the LM curve to the right

c)Both (a) and (b)

d)None of the above

14. Together the IS-LM model shows an equilibrium. This equilibrium denotes

a)An equilibrium in the commodity market

b)An equilibrium in the money market

c)An equilibrium in the market for loanable funds

d)All of the above

15. Suppose that an expansionary fiscal policy has been enacted. To keep interest rates unchanged, what must the central bank do?

a)Nothing

b)Lower real money supply

c)Raise real money supply

d)None of the above

Consider the Following Economy:

Y = (C + I + G + NX) <-Income Identity

C = 300*0.8YD<-Consumption

I = 200-1500r <-investment

NX = 100-0.04Y-500r <-net exports

M^d = (0.5Y-2000r) <-Money Demand

G = 1200

t (tax rate) = 0.2

Money Supply (M^s) = $550

P = $1

a. What is the IS Curve?

b. What is the LM Curve?

c. What are the values of Y (income) and interest rate (r) when the IS-LM model is in equilibrium?

Y = (C + I + G + NX) <-Income Identity

C = 300*0.8YD<-Consumption

I = 200-1500r <-investment

NX = 100-0.04Y-500r <-net exports

M^d = (0.5Y-2000r) <-Money Demand

G = 1200

t (tax rate) = 0.2

Money Supply (M^s) = $500

P = $1

Note that C is given as C = 300 + 0.8YD â 1,000r. This consumption will be used to find the following:

a. What is the IS Curve under these assumptions?

b.What are the values of income (Y) and the interest rate (r) when the IS-LM model is in equilibrium?

CAS EC 202 Lecture Notes - Lecture 12: Stock Market Crash, Monetary Policy, Fiscal Policy

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