a Suppose Congress passes legislation that significantly reduces taxes Use the

A suppose congress passes legislation that

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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. 5 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. 6 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. 7 CHAPTER 11 REVIEW QUESTIONS
b. Explain in words what happens to equilibrium interest rate as a result of the open-market purchase. 20. In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, “When people have more money, they can spend it on goods and services.”a. In the IS-LM model, will a tax cut change the money supply in the economy?

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