Chapter 11/12 Flashcards
no one knows
What is the income-interest rate curve?
Shows where the combos of the level of income and interest rate for which the economy is in equlibrium
Why does the income-interest curve slope downwards?
lower interest rates are associated with higher levels of equilibrium income
What does an increase in government spending do to the income-interest curve?
shifts it right
What is the effect of higher income?
higher demand for money, and with an exogenously fixed supply, raises the equilibrium interest rate
What does the LM curve describe?
the interest rate-income level combinations for which the money market is in equilibrium
Why does the LM curve slope upwards
higher income raise the demand for money and raises interest rates
Holding prices fixed, what does an increase in the nominal money supply due to the LM curve?
shifts the curve right
As k increases of h decreases, what does a given increase in income do?
shift money demand right more, raises the interest rate more, and the LM curve is steeper
What is the equilibrium between the IS and LM curve tell us? What is the assumption?
The combo of income and interest rates for which the goods and money markets are simultaneously in equilibrium. We assume constant prices
What does an expansionary monetary policy do to the LM curve?
LM shifts to the right, lowering interest rates and raising income
When is monetary policy more effective in changing income?
When LM is steeper
What does expansionary fiscal policy do to the IS curve?
shifts IS to the right, raising both income and interest rates
What do higher interest rates crowd out?
some private investment
