a
To show:Effect on IS and LM curve due to decrease in the expected future real interest rate.
a
Explanation of Solution
A decrease in expected future interest rates will cause the IS curve to shift to the right. It will also cause the LM curve to shift downwards. Since expectations of future interest rates will affect current variables, the LM curve would shift downwards in much the same way as it would under monetary expansion. The IS curve will shift to the right, causing output to increase and the current interest rate to decrease.
Introduction:
IS curve is a graphical representation of goods
LM curve is a graphical representation of
b)
To show:Effect on IS and LM curve due to an increase in the current real policy interest rate
b)
Explanation of Solution
Increasing the current money supply would shift the LM curve downwards. If the expectations of financial market participants do not change, the IS curve will remain the same and output won't change by much. If people expect the future interest rates to change, the IS curve right shift to the right, increasing output by a significant amount.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
c)
To know:Effect on IS and LM curve due to an increase in expected future taxes.
c)
Explanation of Solution
An increase in future taxes will shift the IS curve to the left. The current output will decrease as consumers will have less disposable income to spend on consumption. This will lead to a lower level of output.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
d)
To find:Effect on IS and LM curve due to decrease in expected future income.
d)
Explanation of Solution
A decrease in expected future income will have the same effect as in part (c). The IS curve will shift to the left and lead to a decrease in consumption. Again, a decrease in future income will cause consumers to have less disposable income, leading to a lower level of output.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
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Chapter 16 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning