question
Investment (I)
answer
I = F(Y, i)
Y - production (assuming that nothing is held in inventory, so Y = sales)
i - interest rate
As sales increase investment increases.
As i increases investment decreases.
Y - production (assuming that nothing is held in inventory, so Y = sales)
i - interest rate
As sales increase investment increases.
As i increases investment decreases.
question
Implications of increase in output
answer
Increase in output leads to an increase in income and an increase in disposable income.
Increase in output leads to an increase in investment.
Increase in output lead to a less than one-for-one increase in demand.
Increase in output leads to an increase in investment.
Increase in output lead to a less than one-for-one increase in demand.
question
Deriving IS curve
answer
Increase in the interest rate decreases investment. Decrease in investment leads to decrease in output, further decreases consumption and investment through multiplier effect.
Represented in downward-sloping IS curve.
Represented in downward-sloping IS curve.
question
Shift in the IS curve to the left
answer
Increase in taxes, decrease in government spending, decrease in c0, decrease in propensity to consume, decrease in investment
question
Shift in the IS curve to the right
answer
Decrease in taxes, increase in government spending, increase in c0, increase in propensity to consume, increase in investment
question
Real money LM equation
answer
M/P = Y[L(i)]
Condition that the real money supply equals the real money demand.
Condition that the real money supply equals the real money demand.
question
Deriving LM curve
answer
Money demand is a decreasing function of interest rate (as interest rate drops, the demand for money increases).
When Y increases, the demand for money increases at any given interest rate.
When Y increases, the demand for money increases at any given interest rate.
question
Shift in the LM curve
answer
Increases in Ms will shift the LM curve down.
question
Fiscal contraction (consolidation)
answer
The government decides to reduce the budget deficit and does so by increasing taxes while keeping spending unchanged.
question
Fiscal expansion
answer
The government decides to increase budget deficit and either increases spending or decreases taxes.
question
Monetary-fiscal policy mix (policy mix)
answer
The combination of monetary and fiscal policies.
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