ECON 232 Final Exam Study Guide - Final Exam Study Guide Questions To-Do Read notes review session textbook problems Chapter 13 numerical#4 Chapter 9

ECON 232 Final Exam Study Guide - Final Exam Study Guide...

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Final Exam Study Guide Questions To-Do Read notes, review session, textbook, problems, Chapter 13, numerical #4 Chapter 9: IS-LM and AD-AS AS-AD model is based on prices IS-LM model is based on interest rates I=investment, S=saving, L=money demand, M=money supply Classical theory: prices adjust quickly Keynesian theory: sticky prices so government should intervene Y bar =AF(K,N bar ) where K=capital stock, A=productivity, F=production function FE=full-employment line and when the labor market is in equilibrium Y=Y bar IS curve: for any level of output, Y, it shows the real interest rate, r, for which the goods market is in equilibrium The IS curve slopes downward because a rise in output increase desired national saving, thereby reducing the real interest rate that clears the goods market Also at all points, I d =S d Factors that shift the FE curve: When labor supply increases, capital stock increases, or there is a beneficial supply shock the FE line shifts right Factors that shift the IS curve: An increase in expected future output will shift the IS curve up to the right because desired savings fall raising the real interest rates An increase in wealth will shift the IS curve up to the right because desired savings fall raising the real interest rates An increase in government purchases will shift the IS curve up to the right because desired savings fall raising the real interest rates An increase in taxes will have no effect or shift the IS curve down to the left because of the Ricardian equivalence or reduced consumption causes a rise in savings lowering real interest rates An increase in expected future marginal product of capital (MPK) will shift the IS curve up to the right because desired investment rises raising the real interest rates An increase in effective tax rate on capital will shift the IS curve down to the left because desired investment falls lowering the real interest rates Any change that increase the aggregate demand for goods shift the IS curve up and to the right Any change in the economy that reduces desired national saving relative to desired investment will increase the real interest rate and thus shift the IS curve up and to the right
An increase in the aggregate demand for goods, shifts the IS curve up and to the right Factors that shift the LM curve: An increase in the nominal money supply will shift the LM curve down and to the right because real MS increases lowering the real interest rates An increase in price level will shift the LM curve up and to the left because real MS falls raising the real interest rates An increase in expected inflation will shift the LM curve down and to the right because M d falls lowering the real interest rates An increase in nominal interest rate on money (i m ) will shift the LM curve up and to the left because M d increases raising the real interest rates

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