End-of-Chapter Solutions Ch17 - CHAPTER 17 ANSWERS TO END-OF-CHAPTER PROBLEMS Quick Check 1 a b c d e f g False False The IS curve gets steeper False

End-of-Chapter Solutions Ch17 - CHAPTER 17 ANSWERS TO...

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CHAPTER 17 - ANSWERS TO END-OF-CHAPTER PROBLEMS Quick Check 1. 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 increase consumption. Moreover, the hype about the New Economy, combined with increasing stock prices, may have led to favorable expectations about future labor income, which would also tend to increase consumption. b. Subsequent declines in the stock market decreased wealth and may have led consumers to revise (downward) expectations about future labor income, effects that would tend to reduce consumption. 3. a. The IS curve shifts right. b. The LM curve shifts right. c. There are three effects. First, an increase in expected future taxes tends to reduce expected future after-tax income (for any given level of income), and therefore to reduce consumption. This effect tends to shift the IS curve to the left. Second, the increase in future 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 IS curve to the right. Third, the fall in future real interest rates leads to an increase in investment in the medium run and to an increase in output in the long run.

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