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Problem Sets 10 Economic Analysis
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Terms in this set (11)
What do C and Î represent?
C is a constant level of investment and represents the effect of non income variables upon consumption
I is a constant level of investment.
marginal propensity to consume
The MPC is the ratio of a change in consumption to a change in disposable income; it in effect is the slope of the consumption line.
Increase in tax rate, mpc, etc
An increase in the income tax rate, t, reduces the value of the multiplier effect since a change in investment results in less additional disposable income and less induced consumption; an increase in the value of the marginal propensity to consume, c, increases the value of the multiplier effect since there are larger amounts of induced consumption.
what is beta in the consumption equation
Coefficient b represents the interest sensitivity of investment spending. When the value for b is low, an interest rate change has minimal effect upon investment spending. When the value of b is large, an interest rate change has a large effect upon investment spending.
Why does a change in the rate of interest affect output? How large will this change be?
Output changes because the change in the rate of interest results in a change in investment spending. The magnitude of the change in investment depends upon the interest sensitivity of investment. Thus, when b is large and investment is very interest sensitive, a change in the rate of interest has a large effect upon investment spending. Recall that any change in investment induces a change in consumption.
What is an IS schedule?
An IS schedule is simply a locus of points where output equals spending; output is higher as the rate of interest decreases when investment spending is interest sensitive.
What causes the IS schedule to shift?
: IS shifts when there is a change in autonomous spending
Why is there a positive relationship between the rate of interest and the level of output?
Since coefficient h has a negative sign, smaller money balances are demanded at higher rates of interest. Therefore, there are larger money balances available to support higher output levels.
What is a LM schedule?
A LM schedule is a locus of points where the supply of money equals the demand for money.
What causes the LM schedule to shift?
LM shifts when there is a change in any autonomous monetary variable such as M and L.
Which variables affect the slope of LM?
Behavioral coefficients h and k determine the slope of LM; the slope is k/h. As the value of h decreases, the slope of LM increases and LM is steeper. LM is steeper for larger values of k.
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