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The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 20

The IS Curve - all with Video Answers

Educators

Chapter Questions

01:24

Problem 1

"When the stock market rises, investment is increasing." Is this statement true, false, or uncertain? Explain your
answer

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:05

Problem 2

Why is inventory investment counted toward aggregate spending if it isn't actually sold to the final end user?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:04

Problem 3

"since inventories can be costly to hold, firms' planned inventory investment should be zero, and firms should acquire inventory only through unplanned inventory accumulation." Is this statement true, false, or uncer-
tain? Explain your answer

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
01:00

Problem 4

During and in the aftermath of the financial crisis of $2007-2009,$ planned investment fell substantially, despite significant decreases in the real interest rate. What factors related to the planned investment function could explain this?

Nick Johnson
Nick Johnson
Numerade Educator
03:32

Problem 5

If households and firms believe the economy will be in a recession in the future, will this necessarily cause a recession, or have any impact on output at all?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:39

Problem 6

Why do increases in the real interest rate lead to decreases in net exports, and vice versa?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:16

Problem 7

Why does equilibrium output increase as the marginal propensity to consume increases?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:40

Problem 8

If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by $\$ 100$ billion, while consumers become more pessimistic and autonomous consumer spending falls by $\$ 100$ billion, what happens to aggregate output?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
09:25

Problem 9

In each of the cases below, what happens to equilibrium output? Briefly explain how it affects the relevant component(s) of planned spending
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.

Ansh Varma
Ansh Varma
Numerade Educator
01:32

Problem 10

Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:11

Problem 11

If a change in the interest rate has no effect on planned investment spending or net exports, then what does this imply about the slope of the IS curve?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:26

Problem 12

Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn't cut production, what effect would this have on their profits? Why?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:51

Problem 13

"Firms will increase production when planned investment is less than (actual) total investment." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
07:35

Problem 14

In each of the cases below, explain whether the 15 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.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:25

Problem 15

"The fiscal stimulus package of 2009 caused the 15 curve to shift to the left, since output decreased and unemployment increased after the policies were implemented." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
02:25

Problem 15

"The fiscal stimulus package of 2009 caused the IS curve to shift to the left, since output decreased and unemployment increased after the policies were implemented." Is this statement true, false, or uncertain? Explain your answer

Pragya Ahuja
Pragya Ahuja
Numerade Educator
01:48

Problem 16

When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.

Pragya Ahuja
Pragya Ahuja
Numerade Educator
03:26

Problem 17

In its February 18,2010 , edition, the Wall Street Journal stated, "The dollar strengthened $[\ldots .]$ and stocks $1 . . .$. followed suit. The Dow industrials rose 40.43 points, or $0.4 \%$
a. What effect does the strengthened dollar have on the IS curve?
b. What effect does the increase in stock prices have on the IS curve?
c. What is the combined effect of these two events on
the IS curve?

Pragya Ahuja
Pragya Ahuja
Numerade Educator
05:43

Problem 18

Calculate the value of the consumption function at each level of income in the table below if autonomous consumption $=300,$ taxes $=200,$ and $m p c=0.9$

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:47

Problem 19

Assume that autonomous consumption is $\$ 1,625$ billion and disposable income is $\$ 11,500$ billion. Calculate consumption expenditure if an increase of $\$ 1,000$ in disposable income leads to an increase of $\$ 750$ in consumption expenditure.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
View

Problem 20

Suppose that Dell Corporation has 20,000 computers in its warehouses on December $31,2012,$ ready to be shipped to merchants (each computer is valued at $\$ 500$ ). By December $31,2013,$ Dell Corporation has 25,000 computers ready to be shipped, each valued at $\$ 450$
a. Calculate Dell's inventory on December 31,2012
b. Calculate Dell's inventory investment in 2013 .
c. What happens to inventory spending during the early stages of an economic recession?

AG
Ankit Gupta
Numerade Educator
11:41

Problem 21

If the consumption function is $C=100+0.75 Y_{D}$ $I=200,$ government spending is $200,$ and net exports are zero, what will be the equilibrium level of output? What happens to aggregate output if government spending rises by $100 ?$

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
13:23

Problem 22

If the marginal propensity to consume is $0.75,$ how much would government spending have to rise to increase output by $\$ 1,000$ billion? How much will taxes need to decrease to increase output by $\$ 1,000$ billion?

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
02:19

Problem 23

Assuming both taxes and government spending increase by the same amount, calculate an expression for the effect on equilibrium output.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
06:37

Problem 24

Consider an economy described by the following:
\[
\begin{aligned}
\bar{C} &=\$ 3.25 \text { trillion } \\
\bar{I} &=\$ 1.3 \text { trillion } \\
\bar{G} &=\$ 3.5 \text { trillion } \\
\bar{T} &=\$ 3.0 \text { trillion } \\
\bar{N} \bar{X} &=-\$ 1.0 \text { trillion } \\
\bar{f} &=1 \\
m p c &=0.75 \\
d &=0.3 \\
x &=0.1
\end{aligned}
\]
a. Calculate simplified expressions for the consumption function, investment function, and net export function.
b. Calculate an expression for the IS curve.
c. If the real interest rate is $r=2,$ then what is equilibrium output? If $\mathrm{r}=5,$ then what is equilibrium output?
d. Draw a graph of the IS curve, showing the answers from part (c) above.
e. If government purchases increases to $\$ 4.2$ trillion, what will happen to equilibrium output at $r=2 ?$ What happens to equilibrium output at $r=5 ?$ Show the effect of the increase in government purchases in your graph from part (d).

Manasvee Singh
Manasvee Singh
Numerade Educator
06:37

Problem 25

Consider an economy described by the following:
\[
\begin{aligned}
\bar{C} &=\$ 4 \text { trillion } \\
\bar{I} &=\$ 1.5 \text { trillion } \\
\bar{G} &=\$ 3.0 \text { trillion } \\
\bar{T} &=\$ 3.0 \text { trillion } \\
\bar{N} \bar{X} &=\$ 1.0 \text { trillion } \\
\bar{f} &=0 \\
m p c &=0.8 \\
d &=0.35 \\
x &=0.15
\end{aligned}
\]
a. Calculate an expression for the IS curve.
b. Assume that the Federal Reserve controls the inter-
est rate and sets the interest rate at $r=4 .$ What is the equilibrium level of output?
c. Suppose that a financial crisis begins, and $\bar{f}$ increases to $\bar{f}=3 .$ What will happen to equilibrium output? If the Federal Reserve can set the interest rate, then what should the interest rate be set at to keep output from changing?
d. Suppose that as a result of the financial crisis, in addition to $\bar{f}$ increasing as in part (c), planned autonomous investment decreases to $\bar{I}=\$ 1.1$ trillion. Will the change in the interest rate by the Federal Reserve from part
(c) be effective at stabilizing output? If not, what additional monetary or fiscal policy changes could be implemented to stabilize output at the original equilibrium output level in part (b)?

Manasvee Singh
Manasvee Singh
Numerade Educator