IS-LM Model (L9&10)

Question 1

IS-LM

Answer 1

investment/saving
liquidity/money
linked by interest rates

Question 2

is curve represents

Answer 2

equilibrium in the market for goods
equilibrium in financial models for loans supply and demand for loans (savings and investment)

Question 3

is curve

Answer 3

households demand (C)
firms (I)
gov spending (G)
Y (goods supply)= C+I+G (goods demand)
Y-C-G(savings) =I

Question 4

planned expenditure

Answer 4

C(Y-T)+I(r)+G
demand for goods
consumption function with disposable income
investment as a function of real interest rate investment depends on interest rate

Question 5

consumption function

Answer 5

C=C(Y-T) (depends on current disposable income)
T represents net of taxes
C=C0 + c(Y-T)
c= MPC marginal propensity to consume 0<c<1
c0 captures wealth etc

Question 6

NPV

Answer 6

-cost + investment/ discount rate + i2/dr2

Question 7

MPC

Answer 7

Y differentiated with respect to C(Y-T)? check

Question 8

keynesian cross

Answer 8

other graph drawn to find actual expenditure is drawn at y=x as PE=Y at actual compared to PE
positive gap where actual is higher= too much inventory, income falls
negative where actual is lower= too little inventory, income rises (income=Y)

Question 9

Y

Answer 9

1-C ?

Question 10

what shifts the intercept for the line of PE

Answer 10

PE= C0 + c1(Y-T) +I+G
constant C0-c1T+I+G assuming tax is fixed, mpc is fixed

Question 11

affects of a change in gov spending

Answer 11

gov spending increases output, increasing income (Y-T)c1 so they spend more so more demand the larger the mpc the larger the effect overall

Question 12

optimal output

Answer 12

Y= C0+I+G-c1T /1-C1
rearranged

Question 13

gov spending multiplier

Answer 13

dY/dG
effect on total income is 1/1-MPC x change in gov spending

Question 14

nominal vs real interest rate

Answer 14

nominal (i) in monetary/money units
real (r) in terms of goods

Question 15

real interest rate

Answer 15

r=i-pi t+1
i=r + pi t+1

Question 16

inflation

Answer 16

1+inflation pi=pt+1/pt

Question 17

money supply

Answer 17

M/P real money balances
nominal money supply controlled by CB
fixed prices in SR

Question 18

money demand

Answer 18

money demand determined by households, liquidity preferences (deciding whether they want to hold money (liquid asset) or put money in savings (less liquid but gains interest)
money demand falls as interest rate goes up but increases when income increases (more income more transactions)

Question 19

when output/income increases, how can we go back to reaching equilibrium

Answer 19

IS=LM
to lower money demand, you increase interest rate so people save instead of borrowing

Question 20

changes in tax and gov spending

Answer 20

shift the IS curve
gov spending shifts the curve by change in gov spending/ 1-MPC
change in tax x MPC/1-MPC

Question 21

how is aggregate supply determined

Answer 21

determined in the long run by input and tech, prices affected by AD, vertical AS line
short run horizontal,price is fixed bc of menu prices etc, if prices arent fixed it goes as normal

Question 22

output

Answer 22

long run Y+ a(P price level- EP expected price level) if prices are higher than expected, output moves higher

Question 23

sacrifice ratio

Answer 23

to reduce inflation, the proportion GDP must go down by

Question 24

what happens when change in income is less than change in gov spending/1-MPC

Answer 24

crowding out effect