Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 9, Problem 3RQ
To determine
The relationship captured by the LM curve and instances where it would be made to shift to the right and sown.
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What is the LM curve and why does is it positively slope? Explain the factors which can shift the LM curve.
Why do we have upward sloping LM curve? What does it shows? Derive the LM curve. Explain
your answer using the diagrams.
Explain what causes shifts in the LM curve.
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- Based on the articles “Unemployment Claims Remain Historically High” and “US Consumer Spending Rose More Slowly in July” from the August 27, 2020 and August 28, 2020 issues of the wall Street Journal, respectively, please respond to the following questions: a. What do you think caused the substantial reversal in consumer spending after the dramatic drop during March and April of 2020? Illustrate graphically how would that have affected the consumption schedule. b. What seems to be possible reasons why consumer spending has slowed down in July and August? Are these factors consistent with some of the non-income determinants of consumption discussed in the text? If so, which ones? c. Investment spending also fell dramatically during the second quarter of 2020. What shifters in the investment demand curve seem to be important here? d. Given your answer to part c, explain and illustrate graphically using the investment demand curve diagram why a Federal Reserve policy of lower interest…arrow_forwardClearly explain the derivation of the LM curve.distinguish between the traditional, positive-sloping LM curve and the modern horizontal LM curve.arrow_forwardwhat relationship does LM curve plot? explain in words and graphically, why LM curve slops downward.arrow_forward
- Using the IS–LM diagram, show the effects on output and the interest rate of a increase in government spending. Can you tell what happens to investment? Why?arrow_forwardWhy does the LM curve slope upwardarrow_forwardDerive the IS LM curves and briefly explain how the general macroeconomic equilibirum can be reachedarrow_forward
- What are some examples of changes in the economy that would lead to a movement along the IS curve? What are some changes that would shift the IS curve?arrow_forwardIt is possible that the interest rate might affect consumption spending. An increase in the interest rate could, in principle, lead to increases in saving and therefore a reduction in consumption, given the level of income. Suppose that consumption is, in fact, reduced by an increase in the interest rate. How will the IS curve be affected?arrow_forwardConsider the following changes in the macroeconomy and show how to think about them using the IS curve. Explain how and why GDP is affected in the short run (assuming the real interest rate is constant). The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they receive a credit that reduces the taxes they pay on corporate income. A booming economy in Europe this year leads to an unexpected increase in demand by European consumers for US goods. US consumers suddenly love all things made in Brazil and sharply increase their imports from that country. A housing bubble bursts so that housing prices fall by 20% and new home sales drop sharply.arrow_forward
- Draw diagram of a typical IS-LMmodel and indicate the changes in all the variables on the diagram should there be an increase in aggregate expenditure causing a shift of the IS curve to the right ( indicate the shift in the IS curve on your diagram) Indicate where macroequilibrium will be and properly label the axes on the diagram. Briefly explain what you understand such an IS-LM model is actually reflecting in terms of macroeconomicsarrow_forwardWhich equation represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model?arrow_forwardExplain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending is less than production. Be sure to discuss how inventories play a crucial role in the adjustment process. State what happens to GDP and employment during the adjustment process.arrow_forward
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