Use the IS—LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level
(a) Tougher immigration laws reduce the working-age population. (b) There's increased volatility in the prices of stocks and bonds. (c) The government tries to achieve tax equity by an increase in the corporate tax rate. (d) Increased computerization reduces stock market brokerage costs.
(a) The decline in labor supply increases the real wage and reduces employment and output, shifting the FE line to the left. The LM curve shifts up and to the left as the price level rises to restore equilibrium. As a result, the real interest rate rises, reducing consumption and investment.
(b) Real money demand rises, which shifts the LM curve up and to the left. To restore equilibrium, the price level must decline, shifting the LM curve down and to the right. There's no effect on any other variable.
(c) The higher tax rate reduces investment, shifting the IS curve down and to the left. To restore equilibrium, the LM curve shifts down and to the right as the price level falls. As a result, the real interest rate declines, so consumption increases. There's no change in the real wage, employment, or output.
(d) Increased liquidity on nonmoney assets reduces money demand, shifting the LM curve down and to the right. The price level rises, to restore equilibrium by shifting the LM curve back up and to the left. There's no effect on the other variables.
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Which of the following shifts the demand curve for oranges?
A) disastrous weather that destroys about half of this year's orange crop B) a decrease in the price of a pound of bananas, a substitute in consumption for oranges C) an increase in the price of the fuel used to transport oranges to supermarkets D) great weather that produces a bumper orange crop this year
Which of the following describes the substitution effect of a price change?
A) The change in quantity demanded of a good that results from the change in the price of a substitute for the good. B) The change in demand that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. C) The change in quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding everything else constant. D) The change in quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
What is meant by saying that economics is an empirical science?
A) Economic theories will be tested by seeing how well they correspond to people's declared preferences. B) Economic theories cannot be tested because there is no means of measuring economic variables with adequate precision. C) Economic theories cannot be tested because economic variables change too quickly. D) Economic theories will be tested by seeing how well they correspond to real-world phenomena.
Monopolistically competitive firms advertise to attempt to
A) lower their average variable costs. B) build brand loyalty. C) lower barriers to entry. D) increase barriers to entry.