1. According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? (Assume everything else is held constant.)
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...
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