Assume the exchange rate is fixed. Using the IS-LM model, graphically illustrate and explain what effect an increase in consumer confidence will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
An increase in consumer confidence will cause an increase in C and will cause demand to rise and the IS curve to shift to the right. As Y rises, money demand will increase and the domestic interest rate will tend to rise. If i rises, there will be tremendous pressure on the domestic currency to appreciate as demand rises. The central bank cannot let this occur. To prevent this, it must increase the money supply so that i does not rise. We will observe an increase in Y, no change in i, an increase in I (via the increase in I), and a reduction in NX caused by the rise in imports.
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On the graph above, unplanned inventory investment occurs if the economy is moving from point ________ to point ________
A) D; C B) C; B C) B; A D) all of the above E) none of the above
If a hurricane were to wipe out the majority of the eastern seaboard in the United States, it would likely cause a:
A. short-run supply shock. B. long-run supply shock. C. long-run demand shock. D. short-run demand shock.
There are no fixed costs in the long run.
Answer the following statement true (T) or false (F)
A virtuous cycle occurs
A) when lobbyists petition members of Congress to grant a public franchise; the lobbyist then raise money for those Congress members who granted the franchise. B) when monopoly profits are used to create new products for additional monopoly profits. C) when a firm can attract enough buyers initially to increase a product's usefulness and attract even more buyers. D) when a firm's sales volume reaches a level where the firm can take advantage of economies of scale; thereby reducing the price of the product to further boost its sales.