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Question
Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in taxes and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
Answer: In this case, the LM curve shifts up and the IS curve shifts to the left. In this case, output will clearly fall. What happens to the interest rate depends on the relative magnitude of the two policies. The effects on I are again ambiguous.
14) Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
Answer
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Related questions
Q:
For this question, assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a reduction in government spending
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause a reduction in output and have no effect on the interest rate.
Q:
Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.
Q:
Suppose there is a simultaneous central bank sale of bonds and tax increase. We know with certainty that this combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
Q:
Suppose there is a simultaneous Fed sale of bonds and increase in consumer confidence. We know with certainty that these two simultaneous events will cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
Q:
Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
Q:
Under the reasonable dynamic assumptions discussed in the text, a monetary contraction should result in
A) an immediate rise in the interest rate, and no further interest rate changes.
B) an immediate rise in the interest rate, and then a fall in the interest rate over time.
C) an immediate rise in the interest rate, and then a further rise over time.
D) a very gradual but steady rise in the interest rate to its new equilibrium level.
E) no change in the interest rate initially, and then a sudden rise to its new equilibrium value.
Q:
Suppose there is a simultaneous fiscal expansion and monetary contraction. We know with certainty that
A) output will increase.
B) output will decrease.
C) the interest rate will increase.
D) the interest rate will decrease.
E) both output and the interest rate will increase.
Q:
For this question, assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that a reduction in stock market wealth causes a decrease in consumption. Which of the following will tend to occur in a fixed exchange rate regime?
A) a reduction in Y
B) a reduction in the money supply
C) no change in the domestic interest rate
D) all of the above
Q:
The Marshall-Lerner condition is less likely to hold when
A) imports and exports are very price-sensitive.
B) the trade deficit is large.
C) the marginal propensity to consume is very large.
D) the marginal propensity to consume if very small.
E) none of the above
Q:
Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
Q:
We will generally observe that the more open an economy
A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
Q:
In a small country, the effect of a given change in government spending
A) on output is large and the effect on the trade balance is small.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is small and the effect on the trade balance is large.
Q:
An increase in the marginal propensity to import will cause
A) the multiplier to increase and a given change in government spending (G) to have a larger effect on domestic output.
B) the multiplier to increase and a given change in government spending (G) to have a smaller effect on domestic output.
C) the multiplier to decrease and a given change in government spending (G) to have a larger effect on domestic output.
D) the multiplier to decrease and a given change in government spending (G) to have a smaller effect on domestic output.
Q:
A change in which of the following variables will have no direct effect on the level of domestic demand?
A) domestic income
B) the real exchange rate
C) government spending
D) the interest rate (r)
E) none of the above
Q:
Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*). This increase in Y* will not cause which of the following to occur?
A) the domestic country's output to increase
B) the domestic country's consumption to increase
C) the domestic country's output to increase and its trade balance to worsen as imports increase
D) all of the above
E) none of the above
Q:
An increase in government spending will have a greater impact on net exports when
A) the marginal propensity to save is smaller.
B) the economy is closed.
C) the sensitivity of investment to income is smaller.
D) all of the above
E) none of the above
Q:
In an open economy, which of the following will cause an increase in the size of the multiplier?
A) a reduction in the marginal propensity to import
B) a reduction foreign output
C) an increase in the marginal propensity to save
D) all of the above
E) none of the above
Q:
Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect a reduction in foreign output (Y*) will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
Q:
Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect a reduction in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.
Q:
Which of the following is true when a country's trade position is balanced (i.e., NX = 0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) Neither a budget surplus nor deficit exists (i.e., G - T = 0).
Q:
Explain the difference between: (1) the demand for domestic goods; and (2) the domestic demand for goods.
Q:
Because the U.S. traditionally gives more foreign aid than it receives, the U.S. traditionally has a negative value for
A) the capital account balance.
B) the trade balance.
C) investment income.
D) net transfers received.
E) all of the above
Q:
Suppose the interest parity condition holds. Also assume that the one-year interest rate in the United States is 6% and that the one-year interest rate in Canada is 5%. What does this imply about the current versus future expected exchange rate (for the U.S. and Canadian dollars)? Explain.
Q:
Explain what factors determine the expected return on a foreign bond.
Q:
Explain the difference between gross domestic product and gross national product.
Q:
What are the primary causes of hyperinflations? Explain.
Q:
During most episodes of hyperinflation,
A) the inflation rate is high but constant.
B) the inflation rate decreases over time.
C) the inflation rate increases over time.
D) the inflation rate first increases, and then remains constant.
E) the inflation rate increases over time, but then rapidly decreases on its own.
Q:
Given nominal money growth, the amount of seignorage will be greater when
A) tax revenues are higher.
B) real money balances are larger.
C) the inflation rate is higher.
D) foreign lending is higher.
E) none of the above
Q:
When the budget deficit is financed entirely through money creation, the real budget deficit is equal to which of the following?
A) ΔH
B) ΔH - ΔP
C) (ΔH)/P
D) (ΔH)/H
E) P[(ΔH)/H]
Q:
Based on our understanding of the U.S. budget, we know that
A) government accounts treat asset sales as revenues.
B) government accounts do not treat asset sales as revenues.
C) the NIPA accounts treat asset sales as revenues.
D) neither the government accounts nor the NIPA accounts treat asset sales as revenues.