Does interest (nominal or real) impact the consumption function in any way? According to literature consumption in the IS-LM model is affected by changes in output Y and taxes T. But in this question as there is an i for the interest included in the equation does that mean (as I am given a nominal interest rate), use it in my calculations? Or is it just written there to test my knowledge?
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Does interest (nominal or real) impact the consumption function in any way? According to literature consumption in the IS-LM model is affected by changes in output Y and taxes T. But in this question as there is an i for the interest included in the equation does that mean (as I am given a nominal interest rate), use it in my calculations? Or is it just written there to test my knowledge?
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- Examine the impact of a decrease in taxes using IS-LM model on the interest rates, investment and national income (output)The Keynesian Y/AE model and the IS/LM model differ in terms of their treatment of investment production aggregate supply closed economy pricesAssume that a closed economy finds that households have become wealthier. Which one of the following options correctly describes the effects of this increase in wealth on the equilibrium interest rate and level of output in the IS-LM model? (a) Equilibrium output and income will decrease as the interest rate increases; (b) Equilibrium output and income levels will increase and the interest rate will remained unchanged; (c) Equilibrium output and income will decrease but the interest rate will remain unchanged; (d) Equilibrium output and income will increase as the interest rate decreases.
- Do you remember the Harrod-Domar model? Derive it and apply it to a numerical case where d=4%, s=35%, and gY=8% last year. If s is expected to rise to 45% next year, what will happen to gY?Discuss in detail the limitations of the IS-LM model. Why is it unrealistic for todays economiesBased on the IS-LM model, show the graph and explain the effects on the equilibrium levels of income and interest rate when the Central Bank purchases government securities from the public.
- An IS-LM equilibrium that lies below the BP schedule represents aIn the IS-LM model, an equal increase in government expenditure and tax will ...... , ....... and ........ a. increase income / increase interest rate / reduce investment. b. reduce income / reduce interest rate / increase investment. c. increase income / increase interest rate / leave investment unchanged. d. reduce income / reduce interest rate / leave investment unchanged e. leave income unchanged / leave interest rate unchanged / reduce investment.Use the IS-LM model to illustrate graphically the impact on output and interest rates of aone-time increase in the price level due to a large increase in oil prices.Be sure to label:i. the axes;ii. the curves;iii. the initial equilibrium values;iv. the direction the curves shift; andv. the terminal equilibrium values.
- Which one of the following statements is true? In the pre-Keynesian era, prices were assumed not to fully adjust. In the Keynesian model diagram, prices are fixed. GDP is a value of goods and services domestically produced in a country at a given point in time. Say's Law says that demand creates its own production. In the IS/LM model, the interest rate is a function of investment.Consider a closed-economy. The economywide expected future marginal product of capital is MPKf = 50 − 0.05K^f , where Kf is the future capital stock. The depreciation rate of capital, δ, is 10% per period. The current capital stock, K, is 900 units of capital. The real price of a unit of capital is 8 unit of output. Firms pay taxes equal to 20% of their output. The consumption equation is C = 100 + 0.6Y −100r, where C is consumption, Y is output, and r is the real interest rate. Government spending equals 150 and full-employment output is 1000. (a) Suppose the current real interest rate is 10% per period. What are the values of the tax-adjusted user cost of capital, the desired future capital stock, and the desired level of investment? (b) When the real interest rate equals 10%, what are the desired levels of consumption and saving (assuming output is at the full-employment level)? 10 (c) Is the goods market in equilibrium when the real interest rate equals 10%? Provide an intuitive…With respect to the IS/LM model, which of the following statements is false? Interest rates and output are the endogenous variables The position of the IS curve is given by α (alpha) The IS/LM model is an extension of the income-spending model The LM curve maps interest rates and output such that the money market clears Along the IS curve, planned aggregate spending is equal to income