a.
To explain:The main determinants of investment are the level of sales and the interest rate.
a.
Answer to Problem 1QAP
True that the main determinants of investment are the level of sales and the interest rate.
Explanation of Solution
Firms with low level of sales will not required to invest further while firms with high level of sales is required to invest in order to continue the servicing of these sales. Higher the interest rate, the cost of borrowing will increase which further leads to decrease in the level of investment.
Introduction: There is a direct relationship between level of sales and level of investment and inverse relationship between interest rate and level of investment.
b.
To explain: Higher level of output can be achieved only by lowering the interest rate, if all the exogenous variables in the IS relation are constant.
b.
Answer to Problem 1QAP
True that higher level of output can be achieved only by lowering the interest rate, if all the exogenous variables in the IS relation are constant.
Explanation of Solution
The Central bank influence the borrowing and lending by lowering the interest rate which further leads to increase in the output. Assuming if all the exogenous variables in the IS relation are constant.
Introduction:The IS relation shows that how the income depends on the interest rate through the relationship between
c.
To explain: The IS curve is downward sloping because goods
c.
Answer to Problem 1QAP
False that the IS curve is downward sloping because goods market equilibrium does notimply that an increase in taxes leads to lower level of output.
Explanation of Solution
IS curve indicates that with an increase in interest rate output decreases. Similarly with decrease in interest rate output increases which cause the downward sloping of IS curve.
Introduction: The IS curve represents all the combination of income and the real interest rate such that the market for goods and services is in equilibrium.
d.
To explain: If government spending and taxes increase by the same amount, the IS curve does not shift.
d.
Answer to Problem 1QAP
Uncertain that if government spending and taxes increase by the same amount, the IS curve does not shift.
Explanation of Solution
There might be a shift in the IS curve as a decrease in taxes that is completely offset by an increase in government spending.
Introduction: The IS curve represents all the combination of income and the real interest rate such that the market for goods and services is in equilibrium.
e.
To explain: LM curve is upward slopping at the central bank’s policy choice of the interest rate.
e.
Answer to Problem 1QAP
False that the LM curve is not horizontal at the central bank’s policy choice of the interest rate.
Explanation of Solution
Increase in income leads to increase in demand for the money which further leads increase in the interest rate. Therefore, LM curve is upward slopping.
Introduction: LM curve represents the relationship the relationship between real output and interest rates.
f.
To explain: The real money supply is decreases along the LM curve.
f.
Answer to Problem 1QAP
False that the real money supply is not constant along the LM curve.
Explanation of Solution
As output will increase, demand for real money will increase and then central bank is required to increase the supply for real money to maintain the interest rate at constant level.
Introduction: LM curve represents the relationship between real output and interest rates.
g.
To explain: If the nominal money supply is $400 billion and the price level rises from an index value of 100 to an index value of 103; the real money supply rises.
g.
Answer to Problem 1QAP
False. If the nominal money supply is $400 billion and the price level rises from an index value of 100 to an index value of 103; the real money supply would not increase
Explanation of Solution
The real money supply decreases when the nominal money supply is constant and price level increases.
Introduction: LM curve represents the relationship the relationship between real output and interest rates.
h.
To explain: If the nominal money supply rises from $400 billion to $420 billion and the price level rises from an index value of 100 to 102, the real money supply rises.
h.
Answer to Problem 1QAP
True. If the nominal money supply rises from $400 billion to $420 billion and the price level rise from an index value of 100 to 102, the real money supply rises.
Explanation of Solution
The nominal money supply rise by 10% and price level rise by 2%, which will lead to increase in real money supply.
Introduction:LM curve represents the relationship the relationship between real output and interest rates.
i.
To explain: An increase in government spending leads to decrease in investment in the IS-LM model.
i.
Answer to Problem 1QAP
False. An increase in government spending does not lead to decrease in investment in IS-LM model
Explanation of Solution
An increase in government spending will increase the level of output and at the same level of interest rate; investment will increase in IS-LM model.
Introduction: IS-LM model describes equilibrium in both goods and financial markets.
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Chapter 5 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- Demand Supply Supply Demand LOANABLE FUNDS (Billions of dollars) Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to and the level of investment to Scenario 3: Initially, the government's…arrow_forwardAgain, the following graph depicts the market for loanable funds. An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve(s) on the following graph to show the impact of this policy. REAL INTEREST RATE (Percent) Supply Demand QTY OF LOANABLE FUNDS (Billions of dollars) The repeal of the previously existing tax credit causes the real interest rate to and the level of investment toarrow_forwardConsider the following information on aggregate income, consumption expenditure, and planned investment for a country:arrow_forward
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- Problem Set 4: Saving and Investment Economists in Fantasialand, a closed economy, have collected the following information about the economy for a particular year: Y = 9000; C = 6000; T = 1500; G = 1700. The economists also estimate that the investment function is: I = 3300 - 100r, where r is the country’s real interest rate, expressed as a percentage (i.e. r = 1 means interest rate is one percent). Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.arrow_forwardThe following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Supply LOANABLE FUNDS (Billions of dollars) Demand Demand 1 Supplyarrow_forwardScenario 1: Individual Retirement Accounts (IRAS) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is a decrease in the maximum contribution, from $6,000 to $4,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to This change in spending causes the government to run a budget Scenario 3: Initially, the government's budget…arrow_forward
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning