Assignment 2 Flashcards
What is the meaning of a “closed economy”?
There is no imports or exports
Disposable income equals ____
The sum of consumption and saving
The marginal propensity to consume represents
The change in consumption caused by a one-unit change in disposable income
Suppose the consumption is represented by the following: C = 250 + 0.75Yd. The multiplier in this economy is ___
4
multiplier = 1/(1-b), b = 0,75
Suppose the consumption equation is represented by the following: C = 250 + 0.75Yd. The marginal propensity to save is ____
0.25
marginal propensity = 1-b, b= 0.75
What increase the equilibrium output in the short run?
Increase in investment demand
Increase in costumer confidence
Increase in government spending
Decrease in taxes
What is the equation equals demand in a open economy?
C + I + G + X - IM
Autonomous spending in a closed economy equals what equation?
c0 + I + G - c1T
An increase in c1 (where C = c0 + c1Yd from Chapter 3) will cause ____
The ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output
Import in a closed economy is represented by which equation
I = S + (T-G)
An increase in the desire to save by households will cause ____
A reduction in output
Of the models presented in Chapter 3, we know that an equal and simultaneous reduction in G and T will cause ____
a reduction in output
What are the components of money?
Checkable deposits
Coins held by the nonbank public
Bills held by banks
What effects the demand for money?
Interest rate
Nominal income
Prices
What generally occurs when a central bank pursues expansionary monetary policy?
The central bank purchases bonds and the interest rate decreases
What generally occurs when a central bank pursues contractionary monetary policy?
The central bank sells bonds and the interest rate increases
What will occur when an economy is faced with a liquidity trap?
The aggregate demand curve is now vertical
When a liquidity trap situation exists, the most appropriate policy to increase output would be ____
Increase in government spending (G)
When there is an increase in government spending the IS curve will ____
Shift to the right
An increase in the interest rate causes investment spending to decrease, the IS curve will ___
Move leftward
Suppose policy makers decide to reduce taxes. The IS curve ____ and the economy ____ the LM curve
shifts, move along
Suppose investment spending is NOT very sensitive to the interest rate, then we know that the IS curve should be ______
relatively steep
Suppose the demand for money is NOT very sensitive to the interest rate, then we know that the LM curve ______
remain horizontal
An increase in costumer confidence will tend to cause _____ in the IS curve
a rightward shift
Assume that investment does NOT depend on the interest rate. A reduction in the money supply will cause ______ output
no change
An increase in the aggregate price level P, will most likely make the ___ curve shift ____
LM, upward
The IS curve will NOT shift when there is a ______
reduction in the interest rate
An increase in government spending will most likely make the ___ curve shift ____
IS, rightward
If government spending and taxes increases by the same amount. The IS curve shifts ___
rightward
What occurs when the economy moves rightward along a given IS curve?
A reduction in the interest rate causes investment spending to increase
