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Chapter 10: Keynesian Cross and the ISLM Model
Outline for review
The Good Market
x
The Keynesian Cross: (study equations and graphs)
o
What is planned expenditure?
o
What is the equilibrium condition in the Keynesian cross?
o
Fiscal policy and the Multiplier
±
Governmentpurchases multiplier
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Tax multiplier
o
The interest rate, investment, and the IS curve
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Deriving the IS curve: from the Keynesian cross and the investment demand
curve. (draw the connecting three diagrams as in Figure 10.7 p. 288)
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Explain why the IS curve is negatively slope.
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What factors determine whether the curve is steep or flat?
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How fiscal policy shifts the IS curve: Tax and/or G
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Also, look at the Loanablefunds interpretation of the IS curve
The Money Market and the LM Curve
x
The Theory of Liquidity Preference
o
The equilibrium in the market for real money balance: graph and equations.
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The supply of money balance
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The demand for real money balance
o
Income, Money Demand, and the LM Curve
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How the LM is derived from different income level and the market for real
money balance.
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Explain why the LM curve is positively slope.
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What factors determine whether the curve is steep or flat?
o
How Monetary Policy Shifts the LM Curve
Shortrun Equilibrium
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Combine the ISLM curve, the equilibrium of the economy is at the intersection
of the IS curve and the LM curve.
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View Full DocumentPractice Problems
1. For the purposes of the Keynesian cross, planned expenditure consists of:
A) planned investment.
B) planned government spending.
C) planned investment and government spending.
D) planned investment, government spending, and consumption expenditures.
2. According to the analysis underlying the Keynesian cross, when planned expenditure
exceeds income:
A) income falls.
B) planned expenditure falls.
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 Spring '11
 Norrbin
 Macroeconomics, Fiscal Policy, ISLM Model

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