1. Suppose the LM curve is given by (M/P)- d,Y-d,i. The slope of the LM curve is If d, is small, i.e. if money demand is _(sensitive /not very sensitive) to the level of income, then an increase in income will cause a (small /large) _(small /large) increase in money demand and only a increase in the interest rate is necessary to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). Similarly, if d, is small, i.c. if the quantity of money demanded is (sensitive /not very sensitive) to the interest rate, then an increase in income will increase money demand and it requires a (small large) increase in the interest rate to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). 2. For this question, assume that Y-N. Based on our understanding of the labor market model presented in Chapter 6, we know that a reduction in the markup will cause an/a (increase, reduction) in the natural level of output. 3. If u ? -? )

An economy is described by the following equations: C = 2,600+ 0.8 (Y- T) - 10,000r IP = 2,000 10,000r G = 1,800 NX = 0 T = 3,000 The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. Instructions: Enter your response for mpc rounded to one decimal place. PAE=+ 0.8 Y b. Using a table (or algebra if you have used the appendix to this chapter), solve for short-run equilibrium output. Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Leave no cells blank. You must enter 'zero' for the answer to grade correctly. Output Y 9,500 9,600 9,700 9,800 9,900 10,000 10,100 10,200 Planned aggregate expenditure (PAE) Short-run equilibrium output: Y PAE

22. What could have caused the Investment function to move from I1 to I2? 23. Assuming that the Investment function moves from I1 to I2, and assuming the market rate of interest in at 15%, by how much would investment spending decrease?

Assume the economy is starting at point B in the graph below. Interest Rate (percent per year) D 4 a. an interest rate cut? E B F Investment demand Investment demand Rate of Investment (billions of dollars per year) Which point demonstrates the effects on investment of 2 1 From point B to (Click to select) b. an interest rate cut accompanied by decreased sales expectations? From point B to (Click to select)

Consider a Keynesian model of the economy with the following equations; C = 300 + 0.7Yd = 500 TR ァミ250 = 300 = 400 X 150 M = 0,2Y The equilibrium level of income is O €1,500 €2,720 €2,650 O €1,325

Suppose the incoming Biden administration permanently increases taxes and government purchases by equal amounts. 1)What will be the impact (if any) on output in the short run? 2)What will be the impact on the economy’s normal real interest rate (r*) and normal investment (I*, which is the same as normal saving, S*)?

2. Assume a closed economy where the consumption, investment, and government expenditure are C = 350 + 0.3Y; | = 120 - 40r; G = 120 II What is the value of real interest rate which clears the good market when Y (income ) equal to $ 600. Hint (find IS equation first) * 5.5 5.6 4.25 5.9

Consider the following functions for consumption and investment: C = 1,000 + (2/3)*(Y – T) and I = 1,200 – 100*r. Furthermore, Y = 8,000, G = 2500, T = 2,000. Compute private, public, and national savings for this economy, and find the equilibrium real interest rate (r). Assume that G declines by 500 units. How will it change your answers in part (a)? What happens to the national savings, given everything else, if the public decides to consume less out of their disposable income (assume that the propensity of consume falls by 10 percent)? Given your answer in part (c), what happens to investment and real interest rate? Answer all four.

Consider the following picture: c' y'-t' y-t If the interest rate on borrowing (r2) increases, what happens to consumption today? O it increases It decreases O It's unchanged O Not enough information to answer

b