ECON 2000 Chapter Notes - Chapter 10: Liquidity Preference, Keynesian Cross, Money Supply

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23 Feb 2017

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In summary, the lm curve shows the relationship between income and the interest rate that is consistent with the equilibrium in the market for real money balances (demand for real money balances and supply of real money balances) Thus, an increase in income leads to an increase in the interest rate (the quantity of income increases) A quantity-equation interpretation of the lm curve (not very important only another explanation) Y = c(y t) + i(r) + g is. This equation states that actual expenditure (income/output) = planned expenditure. This equation states that the supply of real money balances = the demand for real money balances (which depends on the interest rate and income) The model takes the fiscal policy, g and t, the monetary policy m and the price level p as exogenous (given) The is curve provides the combinations of r and y that satisfies the equation representing the goods market.

Related Questions

LM CURVE

The demand for money is L(R,Y) = 10Y - .5R

M2 Billions CPI Interest Rate

8,400 210 4

1a. Derive the LM Curve.

1b. Find the equilibrium level of income (a number)

c. If the interest rate increases by 1%, how much does the demand for real money balances change?

3. If government spending is decreased, explain and show in the graph the new equilibrium

4. If the money supply is decreased, explain, and show in the graph the new equilibrium.

mauvehippopotamus962

1.In the IS-LM model, if there is a positive exogenous shock to investment, what happens to income (Y) and the rate of interest (r)

? r rises, Y rises

r rises, Y falls

r falls, Y rises

r falls, Y falls

In the IS-LM model, if there is a positive exogenous shock to consumption, and the fiscal authority wants to stabilize output, what policy could it undertake?

increase money supply

reduce government expenditures

reduce taxes

decrease money supply and taxes at the same time

In an usual IS-LM framework, the government increases taxes and government expenditures simultaneously. Which direction does the IS curve shift?

		rightward
		leftward
		stays same
		cannot say

11. Statement 1: The multiplier for autonomous consumption, I and G are different given a specific value of MPC.

Statement 2: The lumpsum tax multiplier is always the G multiplier times the MPC.

a)Statement 1 is true, Statement 2 is true.

b)Statement 1 is true, Statement 2 is false.

c)Statement 1 is false, Statement 2 is true.

d)Statement 1 is false, Statement 2 is false.

12. Pick the correct statement

a)Every point on the IS curve corresponds to an equilibrium value of Y, for a given value of r.

b)Every point on the IS curve corresponds to an equilibrium in the commodity market.

c)Both (a) and (b)

d)None of the above

13. Increase in real money supply

a)Shifts the IS curve to the right

b)Shifts the LM curve to the right

c)Both (a) and (b)

d)None of the above

14. Together the IS-LM model shows an equilibrium. This equilibrium denotes

a)An equilibrium in the commodity market

b)An equilibrium in the money market

c)An equilibrium in the market for loanable funds

d)All of the above

15. Suppose that an expansionary fiscal policy has been enacted. To keep interest rates unchanged, what must the central bank do?

a)Nothing

b)Lower real money supply

c)Raise real money supply

d)None of the above

ECON 2000 Chapter Notes - Chapter 10: Liquidity Preference, Keynesian Cross, Money Supply

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