Explain in detail what effect a reduction in government spending will have on: (1 ) the LM curve; and (2 ) the IS curve
What will be an ideal response?
A reduction in taxes will cause an increase in disposable income and an increase in consumption. The rise in C will cause an increase in demand and the equilibrium level of output in the goods market will be higher. This is reflected in a rightward shift in the IS curve. Goods market events such as this will not cause a shift in the LM curve (only a movement along it).
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If demand is perfectly inelastic, the absolute value of the price elasticity of demand is
A) more than one. B) less than one. C) zero. D) equal to the absolute value of the slope of the demand curve.
Inventory reductions are a signal indicating that
A. the economy is close to disaster. B. the Dow Jones Industrial Average will fall. C. manufacturers need to increase production. D. producers need to lower prices.
In Figure 4-5 above, the money market is in equilibrium
A) at points B, C, and E. B) at points A and E. C) only at point E. D) at points E and D. E) at points A, B, E, and C.
In competitive markets,
a. firms produce identical products. b. buyers can influence the market price more easily than sellers. c. markets are more likely to be in equilibrium. d. sellers are price setters.