Chapter 5 - Goods and Financial Markets: The IS-LM model Flashcards

1
Q

Why is the LM horizontal?

A

CB chooses the interest rate i(bar). For different levels of Y money demand is different, but the CB adjusts the money supply so as to maintain the same interest rate

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2
Q

decrease in i:

A

expansionary monetary policy or monetary expansion

–> tends to boost demand for investment

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3
Q

increase in i:

A

contractionary monetary policy or monetary contraction

–> tends to reduce investment

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4
Q

fiscal contraction/ fiscal consolidation

A

Decrease in G-T

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5
Q

Fiscal expansion

A

Increase in G-T

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6
Q

What do you understand by austerity?

A

Austerity is a political-economic term referring to policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.

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7
Q

deficit reduction in the short run

A

a) given private saving (S), a lower gov. deficit means higher 1
b) fiscal contraction lowers output and so S goes down by more than T-G increases
- -> so I decreases

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