a. The central bank decreases the money supply.
i. The interest rate ________increases_______________________ ii. Income ____________decreases__________________________ iii. Consumption ___________decreases______________________ iv. Investment ___________decreases________________________
b. The government decreases its level of expenditures.
i. The interest rate _________decreases______________________ ii. Income ___________decreases___________________________ iii. Consumption __________decreases_______________________ iv. Investment ___________increases________________________
c. The government imposes a new lower level of taxes.
i. The interest rate _________increases______________________ ii. Income ________________increases______________________ iii. Consumption ___________increases______________________ iv. Investment ______________decreases_____________________
d. The government increases government spending while at the same time it increases taxes by exactly the same amount. i. The interest rate __________increases_____________________ ii. Income _____________increases but by less than the change in government spending and the change in taxes_________________________ iii. Consumption __________decreases_______________________ iv. Investment ______________decreases_____________________
2. Use the following information to answer this set of questions. An economy can be described by the following equations:
C = 200 + 0.75(Y – T)
I = 200 – 25r
G = 100 and is constant and exogenously determined
T = 100 and is constant and exogenously determined
The demand for real money balances = M/P = Y – 100r M = money supply = 1000
P = price...