Chapter . Chapter 12 – Question 3

Step 1

Work It Out
true
true
You must read each slide, and complete any questions on the slide, in sequence.

Question

Consider the economy of Wiknam.

The consumption function is given by

C = 200 + 0.75(Y – T).

The investment function is

I = 200 – 25r.

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
Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

Question

The money demand function in Wiknam is

(M/P)d = Y – 100r.

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
Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income.

Question

Find the equilibrium interest rate r and the equilibrium level of income Y.

The equilibrium interest rate, r, = /8GnNiFt8aA=%

The equilibrium level of income, Y, = 6sohfSMDfAVHf+m7Ole7HQ==

Review Chapter 11 pages 324-325, along with Figure 11-7, for a discussion of how to derive the IS curve. Review pages 330-331, along with Figure 11-11, for a discussion of how to derive the LM curve. Review pages 332-334, along with Figure 11-13, for a discussion of how to solve the ISLM model for the equilibrium interest rate and level of income
4:34

Step 2

Question

Consider the economy of Wiknam.

Suppose that government purchases are increased from 100 to 150. How does the IS curve shift? What are the new equilibrium interest rate and level of income? (Hint: You will need to draw this graphically to answer these questions.)

The IS curve shifts to the y/8elwqLKvMQPfWtffwxDQ== by ygJZKffxRWs=.

The equilibrium interest rate, r, = 8mHGoby8We4=%.

The equilibrium level of income, Y, = WYWjVQzT4dmH8TewByKWKg==.

The graph is entitled “Increase in Government Purchases”. The vertical axis is labeled “r”, which is the interest rate, and the horizontal axis is labeled “y”, which is the income. The initial IS curve and the new IS curves are plotted as two negatively sloped lines. The initial IS curve intersects the vertical axis at 13, and the horizontal axis at 1700. The new IS curve intersects the vertical axis at 15, and the horizontal axis at 1900. The LM curve is an upward sloping line and intersects the horizontal axis at 500. The two points where the LM curve intersects the two IS curves are labeled A and B. These are the equilibrium points. For the initial IS curve, the equilibrium for the economy represented by Point A occurs at an interest rate is 6 percent, and an income level of 1100. For the new IS curve, the equilibrium for the economy represented by Point B occurs at an interest rate is 7 percent, and an income level of 1200.

Question

Suppose instead that the money supply is increased from 1,000 to 1,200. How does the LM curve shift? What are the new equilibrium interest rate and level of income? (Hint: You will need to draw this graphically to answer these questions.)

The LM curve shifts to the y/8elwqLKvMQPfWtffwxDQ== by b0g0iQ1whKk=.

The equilibrium interest rate, r, = lQU/msSmG8pAxHKo%.

The equilibrium level of income, Y, = wl551jLhEfYkzXW3hfnkzg==.

The graph is entitled “Increase in the Money Supply”. The vertical axis is labeled “r” or the interest rate, and the horizontal axis is labeled “y” or the income. The IS curve is a negatively sloped line, intersecting the vertical axis at 13 and the horizontal axis at 1700. The initial and new LM curves are upward sloping lines. The two points where the LM curves intersect the IS curve are labeled A and B. For the initial LM curve, the equilibrium for the economy represented by Point A occurs at an interest rate is 6 percent, and an income level of 1100. For the new LM curve, the equilibrium for the economy represented by Point B occurs at an interest rate is 5.5 percent, and an income level of 1150.
3:12

Step 3

Question

Consider the economy of Wiknam.

With the initial values for monetary and fiscal policy, suppose that the price level rises from 2 to 4. What happens? What are the new equilibrium interest rate and level of income?

The LM curve shifts to the yoX+FmCfDVxx7+iS0HQtzg== by xT0dQ64T6ZI= as shown in the graph.

The equilibrium interest rate, r, = auImN4vhA0UVovIL8EuRJw==%

The equilibrium level of income, Y, = AzYnkHgjX/A=.

The graph is entitled “Increase in the price level”. The vertical axis is labeled “r”, or the interest rate and the horizontal axis is labeled “Y”, or the income. The IS curve is a negatively sloped line, intersecting the horizontal axis at 1700. The initial and new LM curves are upward sloping lines. The initial LM curve intersects the horizontal axis at 500, and the new LM curve at 250. The two equilibrium points where the LM curves intersect the IS curve are labeled A and B. For the new LM curve derived from the new price level, the equilibrium for the economy represented by Point B occurs at an interest rate is 7.25 percent, and an income level of 975.

Question

Below is the graph for the aggregate demand curve for the initial values of 1000 for the money supply, 100 for government purchases, and 100 for taxes. What happens to this aggregate demand curve if fiscal or monetary policy changes, as in parts (d) and (e)?

The graph is entitled “Aggregate Demand Curve”. The vertical axis is labeled “P”, which is the price level, and the horizontal axis labeled “Y”, which is the income. The AD curve has the equation Y = 850 + 500/P.

An increase in government purchases will shift the aggregate demand curve to the YTxupA9odwwbF3kWVI4ZRw==. An increase in the money supply will shift the aggregate demand curve to the YTxupA9odwwbF3kWVI4ZRw==.

Review Chapter 12 pages 346-350, along with Figure 12-5, for a discussion of how to derive the aggregate demand curve from the ISLM model. See Figure 12-6 for details of how changes in fiscal and monetary policy shift the aggregate demand curve. A shift to the right in the aggregate demand curve is shown in the graph below.

The graph is entitled “Increase in Aggregate Demand”. The vertical axis is labeled “P”, which is the price level, and the horizontal axis is labeled “Y”, which is the income. The initial AD curve and the new AD curve (which is shifted to the right) are shown.
3:39