Economics 110B Practice Questions for Chapter 17 1Questions 1) Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations. 2) Explain the determinants of aggregate private spending. 3) Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period. 4) Explain what effect a reduction in the future expected interest rate will have on the IS curve and LM curve in the current period. 5) Compare the following three ways to model expectations: animal spirits, adaptive expectations, and rational expectations. 6) Suppose the central bank implements a monetary expansion in the current period and is expected to continue this monetary expansion in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate. 7) Suppose fiscal policy makers pass a budget that increases taxes in the current period and are expected to raise taxes in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate. 8) Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output. 9) Suppose the central bank announces that it will pursue a monetary expansion in the current period and a monetary expansion in the future. Explain how the credibility of the central bank might influence the effectiveness of this monetary policy action and announcement of a future monetary policy action. 10) Explain whether a fiscal policy that causes an increase in current and future government spending can cause a reduction in current output.