Chapter 11 Review

# Chapter 11 Review - Chapter11: OutlineforReview o...

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Chapter 11: Applying the IS-LM model Outline for Review x Factors affecting equilibrium income and the interest rate o Monetary policy Ȃ a change in money stock M S ± Shifts in the LM curve 9 Explain how the new equilibrium is achieved 9 Evaluate short-run changes in Y and r o Fiscal policy Ȃ G and/or T ± Shifts in the IS curve 9 Explain how the new equilibrium is achieved 9 Evaluate short-run changes in Y and r Question 1 : Within the IS-LM model, show how income and interest rate are affected by each of the following changes. a. An increase in government spending b. An increase in taxes c. An increase in money stock d. An increase in government spending financed by an equal increase in taxes. In each case explain briefly why the changes in income and the interest rate occur. Question 2 : Assume the following model of the economy, with the price level fixed at 1.0: C = 0.8(Y Ȃ T) T = 1,000 I = 800 Ȃ 20r G = 1,000 Y = C + I + G Ms/P = Md/P = 0.4Y Ȃ 40r Ms = 1,200 a. Write a numerical formula for the IS curve, showing Y as a function of r alone. (Hint: Substitute out C, I, G, and T.) b. Write a numerical formula for the LM curve, showing Y as a function of r alone. (Hint: Substitute out M/P.) c. What are the short-run equilibrium values of Y, r, Y Ȃ T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I. d. Assume that G increases by 200. By how much will Y increase in short-run equilibrium? What is the government-purchases multiplier (the change in Y divided by the change in G)? e. Assume that G is back at its original level of 1,000, but Ms (the money supply) increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for money supply (the change in Y divided by the change in Ms)?

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x Policy effectiveness and the slopes of IS and LM curves
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Chapter 11 Review - Chapter11: OutlineforReview o...

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