CHAPTER 17 - ANSWERS TO END-OF-CHAPTER PROBLEMSQuick Check1.a.False.b.False. The IS curve gets steeper.c.False.d.True/Uncertain. Consumers can rely on forecasts by others, but somebody has to do it.e.False.f.True.g.False.2. a. Higher real stock prices led to an increase real wealth directly, which tended to increaseconsumption. Moreover, the hype about the New Economy, combined with increasingstock prices, may have led to favorable expectations about future labor income, whichwould also tend to increase consumption. b.Subsequent declines in the stock market decreased wealth and may have led consumers torevise (downward) expectations about future labor income, effects that would tend toreduce consumption.3.a.The IScurve shifts right.b.The LMcurve shifts right.c.There are three effects. First, an increase in expected future taxes tends to reduceexpected future after-tax income (for any given level of income), and therefore to reduceconsumption. This effect tends to shift the IScurve to the left. Second, the increase infuture taxes (a deficit reduction program) tends to reduce real interest rates in the future.The fall in the expected future interest rate tends to shift the IScurve to the right. Third,the fall in future real interest rates leads to an increase in investment in the medium runand to an increase in output in the long run.