AD Models

Question 1

IS-LM model

Question 2

Exogenous money supply

Answer 2

Money supply that is not dependant on the demand for money; vertical line

Question 3

Endogenous money supply

Answer 3

Money supply that is dependant on the demand for money

Question 4

Money demand curve

Answer 4

Depends on the Elasticity of liquidity preference
Under Keynesian belief, speculative money demand is higher responsive to changes in interest rates.
If individuals believe interest rates will increase, and thus the price of bonds fall, few individuals will want to buy the bonds now.
Instead they will hold money or near money, creating an elastic demand curve

Question 5

The interest rate transmission mechanism

Answer 5

Increase money supply
Decrease interest rates
Increase investment, decrease savings
Increase injections, decrease withdrawals
Increase GDP
Increase prices

Question 6

Problems with interest rate transmission mechanism

Answer 6

Elasticity of liquidity preference: Liquidity trap -Lower interest rates do not achieve economic growth from lower interest rates as money is held in idle balances, as it is believed that the central bank will have to increase rates

Unstable liquidity preference from changing expectations about the future level of interest rates

Elasticity of investment curve - Dependants on expectation and confidence not just interest rates

Question 7

Exchange rate transmission mechanism

Answer 7

Increase money supply
Decrease interest rates
Decrease demand for money
Depreciation
Increase exports, decrease imports
Increase injections, decrease withdrawals

Question 8

Permanent change in factor

Answer 8

Both curve shifts