test 2 pt2

Question 1

The tax multiplier is:

Answer 1

change in Y/ change in T = -MPC / (1 - MPC)

Question 2

the investment function is graphed _________ sloping showing the inverse (negative) relationship between…

• To determine how …., we combine the investment function with the Keynesian-cross diagram.

Answer 2

downward
investment and the interest rate.

income changes when the interest rate changes

Question 3

The IS curve summarizes this relationship between the …

• Because an increase in the IR causes planned investment to ___, which in
  turn causes income to ____, the IS curve slopes _______

Answer 3

interest rate and the level of income.

fall; fall
downward.

Question 4

The IS curve is drawn for a given ________.

• Changes in fiscal policy that RIASE the demand for goods and services shift the IS curve to the _____.
• Changes in fiscal policy that REDUCE the demand for goods and services shift the IS curve to the ____.

Answer 4

fiscal policy

right
left

Question 5

Changes in fiscal policy _____ the IS
changes in IR ______the IS

Answer 5

Shift
move

Question 6

LM
- the supply of real money balances (M/P); both of these variables are taken to be exogenously (fixed) given. This yields a _____supply curve.

Answer 6

vertical

Question 7

The theory of liquidity preference suggests that a HIGHER interest rate _____ the quantity of real balances demanded, because r is the ….

• The supply and demand for real money balances determine the _______. At the equilibrium interest rate, the quantity of money balances ____ EQUALS the quantity ______.

Answer 7

lowers
opportunity cost of holding money.

interest rate
demanded; supplied

Question 8

Money Market Equilibrium formula

Answer 8

L(r) = M/P
money demand = real money balances

Question 9

The quantity of real money balances demanded is _____ related
to the ______(because r is the opportunity cost of holding money) and _______related to _____(because of transactions demand).

Answer 9

negatively; interest rate
positively; income

Question 10

Since the price level is fixed, a reduction in the money supply _______ the supply of real balances. and causes interest rate to _____.

Answer 10

reduces
rise

Question 11

An increase in income _____ money demand, which increases the interest rate; this is called an increase in ….

Answer 11

raises
transactions demand for money.