chapter 9 mishkin (9)

8/10/2019 Chapter 9 Mishkin (9)

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Macreconomics: Policy and Practice(Mishkin)

Chapter 9 The IS Curve

9.1 Planned Expenditure

1) There are no questions for this section.Answer:

9.2 The Components of Expenditure

1) Total areate demand includes !!!!!!!!.A) planned in"estment spendin#) consumption expendituresC) net exports$) all of the a%o"eE) none of the a%o"e

Answer: $Topic: 9.1 The Components of Expenditure

2) The consumption function shows how !!!!!!!!.A) the marinal propensit& to consume "aries with disposa%le income#) income "aries as a result of chanes in consumptionC) consumption depends on the decision to sa"e$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.1 The Components of Expenditure

') Consumption expenditures decrease when !!!!!!!!.A) the real interest rate falls#) disposa%le income increasesC) autonomous consumption increases$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

+) ,f disposa%le income falls- consumption expenditure falls !!!!!!!!.A) %& an amount that depends on the real interest rate#) so that planned expenditure remains constantC) %& an amount smaller than the decrease in disposa%le income$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

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0) Total planned expenditure equals total output) is 1+-/// when autonomous consumptionexpenditure is +0/. hen autonomous consumption expenditure falls to +//- total plannedexpenditure equals total output) is 1'-3//. The marinal propensit& to consume is !!!!!!!!.A) /.39#) /.40

C) /.99$) /.++E) /./'Answer: #Topic: 9.1 The Components of ExpenditureAAC(#: Anal&tical (*ills

5) Total planned expenditure equals income) is 1'-0//- autonomous consumption expenditure is5//- the marinal propensit& to consume is /.3- o"ernment purchases are 2-4//- taxes are 2-0//and planned in"estment spendin is 2-9//. 6et exports is !!!!!!!!.A) '-3+/

#) neati"e 1-0//C) neati"e 1-'3/$) neati"e 1-'+/E) 2-1//Answer: #Topic: 9.1 The Components of ExpenditureAAC(#: Anal&tical (*ills

4) Consumption expenditure is 10-///- o"ernment purchases are 0-///- planned in"estmentspendin is +-/// and net exports are 1-0//. ,f total output is 20-///- then unplanned in"entor&in"estment is !!!!!!!!.A) neati"e 0//#) 2-0//C) '-0//$) +-///E) neati"e +0/Answer: ATopic: 9.1 The Components of ExpenditureAAC(#: Anal&tical (*ills

3) An increase in the real interest rate will cause an increase in !!!!!!!!.A) sa"in#) planned in"estmentC) net exports$) all of the a%o"eE) none of the a%o"eAnswer: ATopic: 9.1 The Components of Expenditure

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9) An decrease in the real interest rate will cause an increase in !!!!!!!!.A) consumption#) planned in"estmentC) net exports$) all of the a%o"e

E) none of the a%o"eAnswer: $Topic: 9.1 The Components of Expenditure

1/) hen firms spend more on additional holdins of raw materials- parts and finished oods!!!!!!!!.A) the& are increasin their fixed in"estment#) the& are increasin their in"entor& in"estmentC) the& are increasin their pri"ate consumption$) all of the a%o"eE) none of the a%o"e

Answer: #Topic: 9.1 The Components of Expenditure

11) 7ixed in"estment is t&picall& !!!!!!!!.A) smaller than in"entor& in"estment#) calculated as the chane in holdins of raw materials and finished oodsC) planned spendin on equipment- structures- and new residential housin$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.1 The Components of Expenditure

12) Planned in"estment spendin !!!!!!!!.A) is equal to planned fix in"estment spendin plus the amount of in"entor& in"estment planned%& firms#) is closel& related to the real interest rateC) is hea"il& influenced %& expectations a%out the future$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.1 The Components of Expenditure

1') Planned in"estment spendin !!!!!!!!.A) is equal to planned fixed in"estment spendin plus o"ernment in"estment#) is unrelated to the real interest rateC) is hea"il& influenced %& expectations a%out the future$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.1 The Components of Expenditure

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1+) ,n"estment spendin !!!!!!!!.A) is comprised of fixed and in"entor& in"estment#) is neati"el& related to the real interest rateC) is hea"il& influenced %& what 8e&nes coined as animal spirits$) all of the a%o"e

E) none of the a%o"eAnswer: $Topic: 9.1 The Components of Expenditure

10) hen the .(. real interest rate falls !!!!!!!!.A) .(. dollar assets earn a hiher return relati"e to forein assets#) it ma*es .(. exports more expensi"e in forein currenciesC) imports will decrease$) all of the a%o"eE) none of the a%o"eAnswer: C

Topic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

15) hen the .(. real interest rate rises !!!!!!!!.A) .(. dollar assets earn a lower return relati"e to forein assets#) ma*es .(. exports more expensi"e in forein currenciesC) imports will decrease$) all of the a%o"eE) none of the a%o"eAnswer: #Topic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

14) hen the .(. real interest rate rises !!!!!!!!.A) .(. dollar assets earn a hiher return relati"e to forein assets#) ma*es .(. exports cheaper in forein currenciesC) imports will decrease$) all of the a%o"eE) none of the a%o"eAnswer: ATopic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

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13) 6et exports !!!!!!!!.A) are hea"il& determined %& forein demand for domestic oods#) are hea"il& determined %& domestic demand for domestic oodsC) are independent of domestic interest rate fluctuations$) all of the a%o"e

E) none of the a%o"eAnswer: ATopic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

19) Planned expenditures !!!!!!!!.A) are directl& affected %& o"ernment purchases#) increase when there is a reduction in taxesC) decrease when disposa%le income decreases$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

2/) hat is the meanin of animal spirits; es. Planned in"estment relies mostl& on %usiness expectations offutureeconomicacti"it&. 7luctuations in current acti"it& affect in"estment as unplanned in"entor& chanes and-perhaps- as an updatin of expectations- causin a chane in autonomous in"estment.Topic: 9.1 The Components of ExpenditureAAC(#: eflecti"e Thin*in

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22) Acme #rands in"ested ?0 million in 2/1/ on new equipment- spent ?40/ thousand toincrease its in"entor& of intermediate components- and added ?20 thousand to its in"entor& offinished oods. At &ear=s end- the components in"entor& is found to %e ?2// thousand a%o"e its%einnin@of@the@ &ear le"el- and finished oods in"entor& is up ?'/ thousand o"er its startinle"el. Calculate planned in"estment- unplanned in"estment- and actual total) in"estment.

Answer: Planned in"estment is ?0 million plus ?40/ thousand plus ?20 thousand equals ?0.440million. nplanned in"estment is ?2// thousand minus ?40/ thousand plus ?'/ thousand minus?20 thousand equals neati"e ?0+0 thousand. Actual in"estment is ?0 million plus ?2// thousandplus ?'/ thousand equals ?0.2' million equals ?0.440 million minus ?0+0 thousand).Topic: 9.1 The Components of ExpenditureAAC(#: Anal&tical (*ills

9.' oods Bar*et Equili%rium

1) The ,( cur"e !!!!!!!!.A) shows the relationship %etween areate output and the real interest rate when the oodsmar*et is in equili%rium#) tells us that increases in autonomous consumption- in"estment- o"ernment purchases- or netexports raise output for an& real interest rateC) tells us that a decrease in taxes leads to increases in output for an& i"en real interest rate$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

2) ,n the ,( cur"e !!!!!!!!.A) an increase in the interest rate constitutes an upward mo"ement alon the cur"e#) an increase in areate consumption constitutes a downward mo"ement alon the cur"eC) an increase in taxes constitutes a rihtward shift of the cur"e$) all of the a%o"eE) none of the a%o"eAnswer: ATopic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

') The ,( cur"e !!!!!!!!.A) traces out the points at which the oods mar*et is in equili%rium#) tells us how consumption expenditures fall as the real interest rises

C) tells us that as the real interest rate rises planned expenditures o down leadin to increases insa"ins that satisf& the oods mar*et equili%rium$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

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3) ,n the ,( cur"e- if > falls for an& i"en le"el of the real interest rate !!!!!!!!.A) consumption increases#) output increasesC) sa"in increases$) all of the a%o"e

E) none of the a%o"eAnswer: ETopic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

9) ,n the ,( cur"e- a cut in taxes !!!!!!!!.A) causes planned expenditures and hence equili%rium output to rise when the interest rateincreases#) causes planned expenditures and hence equili%rium output to fall when the interest rateincreasesC) causes the equili%rium interest rates to fall

$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

1/) The reason for the downward@slopin ,( cur"e is that !!!!!!!!.A) lower interest rates lead to lower sa"in and lower output#) lower interest rates lead to lower sa"in and hiher outputC) hiher interest rates lead to lower sa"in and hiher output$) all of the a%o"eE) none of the a%o"eAnswer: #Topic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

11) The reason for the downward@slopin ,( cur"e is that !!!!!!!!.A) lower interest rates lead to hiher sa"in and hiher output#) hiher interest rates lead to hiher sa"in and lower outputC) hiher interest rates lead to lower sa"in and hiher output$) all of the a%o"eE) none of the a%o"eAnswer: #

Topic: 9.2 oods Bar*et Equili%riumAAC(#: eflecti"e Thin*in

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10) i"en the "alues in the ta%le a%o"e- consumption is !!!!!!!! when equili%rium output is10.A) 12.'#) 11.3C) 12./0

$) 11.00E) none of the a%o"eAnswer: #Topic: 9.2 oods Bar*et Equili%riumAAC(#: Anal&tical (*ills

15) i"en the "alues in the ta%le a%o"e- if the real interest rate rises from 0 to 5- the chane inhousehold sa"in is !!!!!!!!.A) neati"e /.0#) neati"e 1.00C) neati"e /.+0

$) 1.00E) none of the a%o"eAnswer: CTopic: 9.2 oods Bar*et Equili%riumAAC(#: Anal&tical (*ills

IS raph

14) Dn the raph a%o"e- output is a%o"e planned expenditures at point !!!!!!!!.A) A#) #C) $) C F , F F 6.

earranin terms- > @ C @ , F 6. 7or households- sa"in is > @ T @ C. o"ernment sa"inis T @ . 6ational sa"in ( > @ T @ C F T @ > @ C @ . (u%stitutin into the equili%riumequation- ( , F 6. 6ow- the com%ined sa"in %& households and the o"ernment ma& %ereater or less than in"estment- with the difference made up %& a capital outflow 6 H /) orcapital inflow 6 I /)- respecti"el&.Topic: 9.2 oods Bar*et Equili%riumAAC(#: Anal&tical (*ills

9.+ nderstandin the ,( Cur"e

1) There are no questions for this section.

Answer:

9.0 7actors that (hift the ,( Cur"e

1) The ,( cur"e !!!!!!!! when the real interest rate increases.A) shifts to the riht#) shifts to the leftC) shifts up$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"eAAC(#: Anal&tical (*ills

2) The ,( cur"e !!!!!!!!.A) shifts to the riht when autonomous consumption increases#) shifts up when the real interest rate increasesC) shifts to the left when autonomous in"estment increases$) all of the a%o"eE) none of the a%o"eAnswer: ATopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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') The ,( cur"e shifts to the left when !!!!!!!!.A) autonomous consumption increases#) taxes increaseC) autonomous in"estment increases$) all of the a%o"e

E) none of the a%o"eAnswer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

+) The ,( cur"e shifts to the left when !!!!!!!!.A) autonomous consumption increases#) taxes decreaseC) autonomous in"estment decreases$) all of the a%o"eE) none of the a%o"e

Answer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

0) The ,( cur"e shifts to the riht when !!!!!!!!.A) autonomous consumption decreases#) taxes increaseC) autonomous in"estment increases$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

5) ,f the o"ernment increases militar& spendin !!!!!!!!.A) the ,( cur"e would shift to the left#) output will decrease if interest rates remain fixedC) the unemplo&ment rate could fall$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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4) ,f the o"ernment reduces spendin !!!!!!!!.A) the ,( cur"e will shift to the riht#) output will increase if interest rates remain fixedC) consumption will increase$) all of the a%o"e

E) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

3) ,f the o"ernment raises taxes !!!!!!!!.A) planned expenditures fall#) equili%rium output fallsC) the ,( cur"e shifts to the left$) all of the a%o"eE) none of the a%o"e

Answer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

9) ,f the o"ernment cuts taxes !!!!!!!!.A) disposa%le income falls#) planned expenditures riseC) the ,( cur"e shifts to the left$) all of the a%o"eE) none of the a%o"eAnswer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

1/) The 2//9 fiscal stimulus pac*ae was passed !!!!!!!!.A) to pre"ent the real interest rate from risin#) to shift the ,( cur"e to the leftC) to raise areate output at an& interest rate$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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11) The 2//9 fiscal stimulus pac*ae did not wor* !!!!!!!!.A) in that the ,( cur"e did not shift to the riht#) %ecause most of the intended increase in o"ernment spendin too* too lon to *ic* inC) %ecause the increase in o"ernment spendin was not enouh to offset the decline inautonomous expenditure

$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

12) The 2//9 fiscal stimulus pac*ae did not wor* !!!!!!!!.A) %ecause risin interest rates nullified increased expenditures#) %ecause o"ernment spendin rose too quic*l& and too %riefl&C) %ut it pro%a%l& pre"ented the ,( cur"e from shiftin further to the left$) all of the a%o"eE) none of the a%o"eAnswer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

1') Jualitati"el&- an increase in o"ernment purchases has the same impact as an increase inautonomous !!!!!!!!.A) consumption#) in"estmentC) net exports$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

1+) ,n the ,( model- assumin that the real interest rate does not chane- an increase inautonomous !!!!!!!! leads to an increase in the equili%rium le"el of !!!!!!!!.A) in"estmentK consumption#) consumptionK in"estmentC) net exportsK in"estment$) all of the a%o"eE) none of the a%o"e

Answer: ATopic: 9.' 7actors that shift the ,( Cur"e

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10) ,n the ,( model- assumin that the real interest rate does not chane- an increase inautonomous !!!!!!!! leads to an increase in the equili%rium le"el of !!!!!!!!.A) in"estmentK net exports#) consumptionK o"ernment purchasesC) net exportsK taxes

$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"e

15) ,n the ,( model- assumin that the real interest rate does not chane- an increase inautonomous net exports causes total in"estment- planned plus unplanned- to !!!!!!!!.A) fall- then rise %ac* to its initial le"el#) fall- then rise a%o"e its initial le"elC) rise- then fall %ac* to its initial le"el$) all of the a%o"e

E) none of the a%o"eAnswer: ATopic: 9.' 7actors that shift the ,( Cur"e

14) ,n the ,( model- assumin that the real interest rate does not chane- an increase in !!!!!!!!leads to an increase in equili%rium sa"in %& households.A) autonomous in"estment#) o"ernment purchasesC) autonomous net exports$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"e

13) ,n the ,( model- assumin that the real interest rate does not chane- an increase in !!!!!!!!leads to an increase in equili%rium sa"in %& households.A) autonomous consumption#) taxesC) the price le"el$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"e

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19) ,n the ,( model- assumin that the real interest rate does not chane- an increase inautonomous !!!!!!!! leads to a decrease in equili%rium sa"in.A) in"estment#) consumptionC) net exports

$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"e

2/) An increase in autonomous consumption !!!!!!!!.A) lowers planned expenditures#) raises equili%rium output for an& le"el of the interest rateC) causes a mo"ement down alon the ,( cur"e$) all of the a%o"eE) none of the a%o"e

Answer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

21) A decrease in autonomous consumption !!!!!!!!.A) lowers planned expenditures#) raises equili%rium output for an& le"el of the interest rateC) causes a mo"ement down alon the ,( cur"e$) all of the a%o"eE) none of the a%o"eAnswer: ATopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

22) A decrease in autonomous consumption !!!!!!!!.A) raises planned expenditures#) lowers equili%rium output for an& le"el of the interest rateC) shifts the ,( cur"e to the riht$) all of the a%o"eE) none of the a%o"eAnswer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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2') An increase in autonomous in"estment !!!!!!!!.A) increases equili%rium output at an& interest rate#) causes a mo"ement down alon the ,( cur"eC) shifts the ,( cur"e to the left$) all of the a%o"e

E) none of the a%o"eAnswer: ATopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

2+) A decrease in autonomous in"estment !!!!!!!!.A) increases equili%rium output at an& interest rate#) causes a mo"ement down alon the ,( cur"eC) shifts the ,( cur"e to the left$) all of the a%o"eE) none of the a%o"e

Answer: CTopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

20) A decrease in autonomous in"estment !!!!!!!!.A) decreases equili%rium output at an& interest rate#) lowers planned expendituresC) shifts the ,( cur"e to the left$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

25) ,f people feel optimistic a%out the future of the econom& !!!!!!!!.A) autonomous consumption miht increase#) autonomous in"estment miht increaseC) it miht shift the ,( cur"e to the riht$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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24) ,n a stoc* mar*et %oom !!!!!!!!.A) autonomous consumption miht increase %ecause stoc* holders miht feel richer andconsume more#) autonomous in"estment miht increase %ecause a hiher stoc* "alue for a firm helps firmsraise funds for increased in"estment

C) the ,( cur"e miht shift to the riht$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

23) ,n a stoc* mar*et %oom !!!!!!!!.A) o"ernment spendin will decrease#) interest rates will decreaseC) sa"in is li*el& to decrease

$) all of the a%o"eE) none of the a%o"eAnswer: ETopic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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IS raph

29) Dn the raph a%o"e- a possi%le cause of the rihtward shift of the ,( cur"e is an increase in!!!!!!!!.A) forein demand for domestic oods#) taxesC) domestic demand for forein oods$) the exchane rateE) none of the a%o"eAnswer: ATopic: 9.' 7actors that shift the ,( Cur"eAAC(#: Anal&tical (*ills

'/) Dn the raph a%o"e- unplanned in"entor& in"estment occurs if the econom& is mo"in frompoint !!!!!!!! to point !!!!!!!!.A) $K C#) CK #C) #K A$) all of the a%o"eE) none of the a%o"eAnswer: $Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: Anal&tical (*ills

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'1) Dn the raph a%o"e- the amount of in"entor& depletion will %e reatest if the econom& ismo"in from point !!!!!!!! to point !!!!!!!!.A) AK $#) $K AC) $K C

$) #K AE) #K CAnswer: ATopic: 9.' 7actors that shift the ,( Cur"eAAC(#: Anal&tical (*ills

'2) Dn the raph a%o"e- if the econom& is at point A when the real interest rate falls- theeconom&=s new situation miht %e indicated %& point !!!!!!!!.A) A#) #C) C

$) $E) none of the a%o"eAnswer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: Anal&tical (*ills

'') Dn the raph a%o"e- if the .(. econom& is at point # in 2//9- then the econom& in 2/1/ is%est represented %& point !!!!!!!!.A) A#) #C) C$) $E) an& of the la%eled points is as ood as the othersAnswer: #Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

'+) eferrin to the raph a%o"e- assume that the econom& is in equili%rium at point A- then an22



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increase in o"ernment purchases shifts the ,( cur"e to the riht- while the real interest rateremains constant. Explain- step@%&@step- how the components of expenditure adLust to %rin theeconom& to its new equili%rium.Answer: The increase in causes neati"e unplanned in"entor& in"estment- so firms respond %&increasin output. As output rises- consumption rises- so in"entories continue to shrin* and

output continues to rise. The increase in consumption is alwa&s a fraction of the increase inoutput- %ecause the marinal propensit& to consume is less than one. The increase inconsumption- the decline in in"entories- and the increase in output all con"ere to Gero as theeconom& approaches its new equili%rium at point C.Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

'0) Assume that households decide to sa"e more- so autonomous consumption is reduced.Explain- step@%&@step- how the components of expenditure adLust to %rin the econom& to its newequili%rium. sin the ,( cur"e equation and the consumption function- compare the initial andnew equili%ria with respect to sa"in and the real interest rate.

Answer: Consumption is reduced- so there is unplanned in"entor& in"estment that sinals firmsto reduce output. $eclinin output causes consumption to decline furtherK unplanned in"entor&in"estment continues and output continues to fall. The decline in consumption is continuall&shrin*in- since households respond to reductions in disposa%le income %& reducin sa"in- aswell as reducin consumption the marinal propensit& to consume is less than one). hen thedecrease in consumption con"eres to Gero- in"entories stop risin and output stops fallin. The

decline in output > . The chane in consumption C F mpc M ( )> @ c M r.

(u%stitutin the first of these equations into the second- simplif&in- then su%stitutin with thefirst equation aain- re"eals that C > @ c M r. ,f the real interest rate does not chane- then

sa"in in the new equili%rium equals the oriinal sa"in in the old equili%rium since output has

fallen %& the same amount as consumption). And- if sa"in has not chaned- then neither has thereal interest rate chaned.Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

'5) Assume that the econom& is in equili%rium when the real interest rate rises. Explain- step@%&@step- how the components of expenditure adLust to %rin the econom& to its new equili%rium.Answer: An increase in the real interest rate reduces consumption- in"estment- and net exports.educed expenditures cause an unplanned in"entor& adLustment to which firms respond %&reducin output. The econom& is mo"in to the left alon the ,( cur"e. The slope of the ,( cur"ereflects the further output declines that occur as consumption falls in response to declinin

output- until the chane in consumption has con"ered to Gero the marinal propensit& toconsume is less than one).Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

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'4) The ,( model implies that a dollar of o"ernment spendin has a larer impact onequili%rium output than does a dollar of taxes. Explain.Answer: ,n the ,( equation- o"ernment purchases are a component of autonomous spendin- nodifferent than autonomous consumption- in"estment- and net exports. 7rom the perspecti"e ofproducers- a customer is a customer. Taxes- clearl&- are not an expenditure. Taxes affect

expenditure %& reducin disposa%le income and- thus- consumption. (ince onl& a fraction ofdisposa%le income is spent for consumption @@ a fraction measured as the marinal propensit& toconsume @@ each dollar of taxes corresponds to a fraction of a dollar ta*en from consumptionexpenditure.Topic: 9.' 7actors that shift the ,( Cur"eAAC(#: eflecti"e Thin*in

'3) 7or simplicit&- the ,( model assumes that neither net exports nor net taxes "ar& with income.A more realistic and complicated) model would drop such assumptions.

chapter 9 mishkin (9)

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