IS-LM: short-run equilibrium

IS-LM: short-run equilibrium

1. 1. An increase in government spending (G) shifts which curve, and in which direction?

   IS to the rightIS to the leftLM to the rightLM to the left

2. 2. Holding the IS curve fixed, an expansionary open-market operation will:

   Raise both Y* and r*Raise Y* and lower r*Lower Y* and raise r*Lower both Y* and r*

3. 3. Which of the following are channels through which a higher interest rate reduces Y in IS-LM?

   Lower investment via I(r) = I0 − b·rLower money demand via k·Y − h·rMultiplier compression of the autonomous shockCrowding out of private spending

4. 4. With c = 0.6, t = 0.2, what is the Keynesian spending multiplier α = 1/(1 − c(1−t))? Round to two decimals.

5. 5. Using the baseline parameters in the lesson chart (c = 0.6, t = 0.2, b = 20, k = 0.5, h = 10, P = 1, G = 100, M = 600, C0 + I0 = 200), compute the equilibrium interest rate r* to one decimal.

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