16. a. Suppose Congress passes legislation that significantly reduces taxes. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income. Be sure to label: i. the axes; ii. The curves; iii. the initial equilibrium values; iv. The direction the curve shifts; and v. the terminal equilibrium values.
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CHAPTER 11 REVIEW QUESTIONS

b. Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.
17. a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income. Be sure to label: i. the axes; ii. The curves;iii. the initial equilibrium values; iv. The direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the increase in the interest rate.
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CHAPTER 11 REVIEW QUESTIONS

The Equilibrium level of income falls.18. a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve on theequilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. The curves; iii. the initial equilibrium values; iv. The direction the curve shifts; and v. the terminal equilibrium values.
19. a. As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. The curves; iii; the initial equilibrium values; iv. The direction the curve shifts; and v. the terminal equilibrium values.
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CHAPTER 11 REVIEW QUESTIONS