Macro: Chapter 5: The Goods & Financial Markets

Question 1

Investments depend on 2 factors:

Answer 1

• Level of sales

- Interest rate

Question 2

Chain of events of the IS Curve (increase in interest rate)

Answer 2

Increase in interest rate
Decreases investment spending
Which leads to a decrease in the demand for goods,
and through the multiplier effect, the level of output and income decreases.

As the demand for goods and output decreases,
consumption spending and investment spending decrease and the multiplier process comes into operation.

Question 3

Shifts in the IS-curve, summary

Answer 3

• Equilibrium in the goods market implies that an increase in the interest rate leads to a decrease in output (hence, downward sloping IS curve)
• Changes in factors that decrease the demand for goods, given interest rate, shift the IS curve to the left, and vice versa.

Question 4

Chain of events for the LM curve: Increase in output

Answer 4

An increase in the level of output increases the demand for money and the interest rate rises in the financial market.

Question 5

Fiscal contraction

Answer 5

One where the government decides to reduce the budget deficit.
AKA Fiscal consolidation

Question 6

Fiscal expension

Answer 6

An increase in the deficit, either due to an increase in government spending or to a decrease in taxes.