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Chapter 21: Q 1. (page 566)
鈥淲hen the stock market rises, investment spending is increasing.鈥� Is this statement true, false, or uncertain? Explain your answer.
The statement is false.
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Go to http://www.eurmacro.unisg.ch/Tutor/islm.html. Set the policy instruments to G = 80, t = 0.20, c = 0.75, and b = 40. Now increase the sensitivity of investment
to the interest rate, b, from 40 to 80. What happens to the slope of the IS curve? Why
If the consumption function is C = 100 + 0.75YD, I = 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output?
What will happen to aggregate output if government spending rises by 100?
If an increase in autonomous consumer expenditure is matched by an equal increase in taxes, will aggregate output rise or fall?
In each of the following cases, determine whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.
a. The real interest rate rises.
b. The marginal propensity to consume declines.
c. Financial frictions increase.
d. Autonomous consumption decreases.
e. Both taxes and government spending decrease by the same amount.
f. The sensitivity of net exports to changes in the real interest rate decreases.
g. The government provides tax incentives for research and development programs for firms.
Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn鈥檛 cut production, what effect would
this have on their profits? Why?
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