{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ps8_ans - the position of the aggregate demand function and...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1)C 2)C 3)B 4)D 5)C 6)A 7)A 8)C 9)A 10)B 11)B 12)B 13)B 14)D 15)D 16)Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount. 17)The increase in the money supply shifts LM to the right, increasing output to Y', above the natural rate Y*. The interest rate falls from i to i' . Excess demand increases the price level, reducing the real value of the money supply. The LM curve shifts back until the all pressure on prices is eliminated by the return to the natural rate of output. The initial and final levels of output and interest rate are the same. No real variables have changed. 18)Keynes realized that government spending and taxes could also affect
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: the position of the aggregate demand function and hence be manipulated to restore the economy to full employment. Students must draw the Keynesian cross diagram and show that according to Keynes's analysis Yad = C + I + G + NX. Thus, government spending adds directly to aggregate demand, while taxes do not affect aggregate demand directly. This is why when there are taxes disposable income does not equal aggregate output. It equals output Y minus taxes T: YD = Y - T. According to Keynes's analysis an equal increase in government spending and taxes in the economy that is in recession can restore full employment output as government spending leads to a multiplied change in aggregate output through the expenditure multiplier: (1/1-mpc) x G. The equal increase in taxes, only reduces consumer expenditure by mpc X T. Thus the final result is an increase in aggregate output....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern