Chapter 20: IS Curve

Question 1

aggregate demand

Answer 1

the total amount of output demanded in the economy

Question 2

AD/AS model

Answer 2

model used to explain SR fluctuation in aggregate output

Question 3

IS curve

Answer 3

describes the relationship between real interest rates and aggregate output when the market for goods and services is in equilibrium
- investment = savings

Question 4

planned expenditures

Answer 4

the total amount that households, businesses, the government, and foreigners wants to spend on domestic goods and services
- planned expenditure = AD

Question 5

actual expenditure

Answer 5

the amount that households, businesses, the government, and foreigners actually spend
- actual expenditures = real/actual Y

Question 6

Four types of spending

Answer 6

1. Consumption expenditure
2. Planned investment spending
3. government purchases
4. net exports

Question 7

disposable income (Y_D)

Answer 7

total amount of income available for spending
- Y_D = Y-T

Question 8

consumption function

Answer 8

C = constant C + mpc * Y_D

Question 9

marginal propensity to consume (mpc)

Answer 9

the change in consumption expenditure from an additional dollar of disposable income

Question 10

autonomous consumption expenditure (constant C)

Answer 10

the amount of consumption expenditure that is exogenous
- related to optimism about future income and HH wealth

Question 11

exogenous

Answer 11

independent of variables in the model

Question 12

Two types of investment spending

Answer 12

fixed and inventory

Question 13

inventory spending

Answer 13

planned spending by firms on additional materials/goods in terms of the change in holding these materials/goods
- some unplanned

Question 14

fixed investment

Answer 14

planned spending by firms on equipment and structures
- fixed > inventory

Question 15

planned investment spending and real interest rates

Answer 15

when real interest rates for investments/the cost of borrowing are low, planned investment spending increases

Question 16

planned investment spending equation

Answer 16

Planned investment spending = fixed investment + planned inventory investment

Question 17

autonomous investment (constant I)

Answer 17

a component of planned investment spending that is completely exogenous which is influenced by optimism/pessimism

Question 18

investment function

Answer 18

I = constant I - dr_i
I = constant I - d(r + constant f)

Question 19

dr_i

Answer 19

responsiveness of investment to the real interest rate for investment

Question 20

financial frictions (constant f)

Answer 20

additions to the real cost of borrowing caused by barriers to financial markets

Question 21

credit spread

Answer 21

interest rate on loans to business - interest rate on safe assets

Question 22

two ways government spending affects aggregate demand

Answer 22

purchases and taxes

Question 23

how does taxes affect AD?

Answer 23

affects disposable income

Question 24

two components of net exports

Answer 24

autonomous net exports and the part of net exports that is affected by changes in real interest rates

Question 25

real interest rates and net exports

Answer 25

a rise in the real interest rate leads to an increase in the value of the dollar which leads to a decline in net exports

Question 26

autonomous net exports (constant NX)

Answer 26

the level of net exports

Question 27

net export function

Answer 27

NX = constant NX - xr

Question 28

x

Answer 28

how net exports respond to the real interest rate

Question 29

IS curve equation

Answer 29

Y = [C + I - df + G + NX - mpc * T] * 1/1-mpc - (d+x)/(1-mpc) * r

Question 30

why the economy heads towards equilibrium

Answer 30

• excess supply of good causes firms to cut production
• excess demand for good causes firms to increase production

Question 31

six autonomous factors that shift AD

Answer 31

1. government purchases
2. change in taxes
3. changes in autonomous spending
4. changes in financial friction

Question 32

AD shifts from government purchases

Answer 32

• increase in purchases causes right shift
• decrease in purchases causes left shift

Question 33

AD shifts from taxes

Answer 33

• rise in taxes causes left shift
• cut in taxes causes right shift

Question 34

AD shifts from autonomous consumption

Answer 34

• rise in consumption causes right shift
• fall in spending causes left shift

Question 35

AD shifts from autonomous investment spending

Answer 35

• increase in investment spending causes right shift
• decrease in investment spending causes left shift

Question 36

AD shifts from net exports

Answer 36

• increase in net exports causes right shift
• decrease in net exports causes left shift

Question 37

AD shifts from financial frictions

Answer 37

• increase in frictions causes left shift
• decrease in frictions causes right shift

Question 38

Animal spirits

Answer 38

unstable exogenous fluctuations influence by emotional waves of optimism and pessimism

Question 39

unplanned inventory investment and output

Answer 39

increase in unplanned inventory investment equals excess output over aggregate demand

Question 40

excess supply and aggregate output

Answer 40

excess supply when aggregate output is right of IS curve and will cause a fall in output

Question 41

excess demand and aggregate output

Answer 41

excess demand when aggregate output is left of IS curve and will cause a rise in output