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Suppose we assume that initially Suppose we assume that initially ,b±= 1, ;if rises 2 percent and the real interest rate rises 2 percent,short-run output rises 2 percent. ,b±= 1, Suppose we assume that initially ,b±= 1, ;if rises 2 percent and the real interest rate rises 2 percent,short-run output rises 2 percent. ;if Suppose we assume that initially ,b±= 1, ;if rises 2 percent and the real interest rate rises 2 percent,short-run output rises 2 percent. rises 2 percent and the real interest rate rises 2 percent,short-run output rises 2 percent.

A) True
B) False

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If we write the consumption function as If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E) ,if If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E) ,the IS curve is given by:


A) If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E)
B) If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E)
C) If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E)
D) If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E)
E) If we write the consumption function as ,if ,the IS curve is given by: A) B) C) D) E)

F) B) and C)
G) A) and D)

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One problem with insurance is that it allows people to live in flood plains.This is an example of adverse selection.

A) True
B) False

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Suppose we assume Suppose we assume , , ,and the real interest rate falls to ) The economy would: A) remain at its long-run equilibrium. B) move from its long-run equilibrium to 1 percent below its potential. C) move from 1 percent below its potential to its longrun equilibrium. D) move from its long-run equilibrium to 1 percent above its potential. E) none of the above , Suppose we assume , , ,and the real interest rate falls to ) The economy would: A) remain at its long-run equilibrium. B) move from its long-run equilibrium to 1 percent below its potential. C) move from 1 percent below its potential to its longrun equilibrium. D) move from its long-run equilibrium to 1 percent above its potential. E) none of the above , Suppose we assume , , ,and the real interest rate falls to ) The economy would: A) remain at its long-run equilibrium. B) move from its long-run equilibrium to 1 percent below its potential. C) move from 1 percent below its potential to its longrun equilibrium. D) move from its long-run equilibrium to 1 percent above its potential. E) none of the above ,and the real interest rate falls to Suppose we assume , , ,and the real interest rate falls to ) The economy would: A) remain at its long-run equilibrium. B) move from its long-run equilibrium to 1 percent below its potential. C) move from 1 percent below its potential to its longrun equilibrium. D) move from its long-run equilibrium to 1 percent above its potential. E) none of the above ) The economy would:


A) remain at its long-run equilibrium.
B) move from its long-run equilibrium to 1 percent below its potential.
C) move from 1 percent below its potential to its longrun equilibrium.
D) move from its long-run equilibrium to 1 percent above its potential.
E) none of the above

F) None of the above
G) A) and E)

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The fundamental lesson of the Life Cycle and Permanent Income hypotheses is that:


A) individuals smooth their consumption patterns over their lifetime.
B) individuals vary their consumption patterns over their lifetime.
C) individuals' consumption patterns vary as their income changes.
D) individuals' consumption changes with changes in their temporary income.
E) taxes are ineffectual.

F) D) and E)
G) A) and B)

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Suppose Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium , Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium , Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium , Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium ,and Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium ) For any given Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium , Suppose , , , ,and ) For any given , Equals __________ and the economy __________. A) 0.00;is in its long-run equilibrium B) 0.90;has experienced a positive aggregate demand shock C) 0.30;has experienced a positive aggregate demand shock D) -0.10;has experienced a negative aggregate demand shock E) 1.00;is in its long-run equilibrium Equals __________ and the economy __________.


A) 0.00;is in its long-run equilibrium
B) 0.90;has experienced a positive aggregate demand shock
C) 0.30;has experienced a positive aggregate demand shock
D) -0.10;has experienced a negative aggregate demand shock
E) 1.00;is in its long-run equilibrium

F) None of the above
G) B) and D)

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When there is a change to potential output,the IS curve shifts.

A) True
B) False

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The basic IS model embodies the Life Cycle and Permanent Income hypotheses by:


A) setting consumption proportional to potential output.
B) keeping consumption growth constant.
C) setting consumption proportional to the real interest rate.
D) setting consumption equal to past income.
E) a and b are correct.

F) B) and E)
G) B) and C)

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In the long run,if the marginal product of capital equals the real interest rate,investment is given by:


A) In the long run,if the marginal product of capital equals the real interest rate,investment is given by: A) . B) . C) . D) . E) . .
B) In the long run,if the marginal product of capital equals the real interest rate,investment is given by: A) . B) . C) . D) . E) . .
C) In the long run,if the marginal product of capital equals the real interest rate,investment is given by: A) . B) . C) . D) . E) . .
D) In the long run,if the marginal product of capital equals the real interest rate,investment is given by: A) . B) . C) . D) . E) . .
E) In the long run,if the marginal product of capital equals the real interest rate,investment is given by: A) . B) . C) . D) . E) . .

F) A) and B)
G) D) and E)

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-Consider Figure 11.6 of the Life Cycle hypothesis.Area(s) __________ are periods of __________,and area(s) __________ are periods of __________. A) A;borrowing;C;dissaving B) A;borrowing;B;saving C) B;dissaving;A and C;saving D) A and C;dissaving;B;saving E) a and b are correct. -Consider Figure 11.6 of the Life Cycle hypothesis.Area(s) __________ are periods of __________,and area(s) __________ are periods of __________.


A) A;borrowing;C;dissaving
B) A;borrowing;B;saving
C) B;dissaving;A and C;saving
D) A and C;dissaving;B;saving
E) a and b are correct.

F) All of the above
G) A) and C)

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The IS curve describes the __________ relationship between __________ and __________.


A) negative;tax rate;investment
B) positive;interest rate;output
C) positive;tax rate;government expenditure
D) negative;interest rate;output
E) negative;interest rate;money supply

F) A) and D)
G) B) and E)

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In the equation In the equation ,if Is close to infinity, A) investment is extremely sensitive to real interest rate changes. B) investment is somewhat sensitive to changes in the marginal product of capital. C) investment is not very sensitive to real interest rate changes. D) investment is sensitive to tax rate changes. E) none of the above ,if In the equation ,if Is close to infinity, A) investment is extremely sensitive to real interest rate changes. B) investment is somewhat sensitive to changes in the marginal product of capital. C) investment is not very sensitive to real interest rate changes. D) investment is sensitive to tax rate changes. E) none of the above Is close to infinity,


A) investment is extremely sensitive to real interest rate changes.
B) investment is somewhat sensitive to changes in the marginal product of capital.
C) investment is not very sensitive to real interest rate changes.
D) investment is sensitive to tax rate changes.
E) none of the above

F) All of the above
G) B) and E)

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-Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________. A) B) C) D) E) Not enough information is given. -Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________.


A) -Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________. A) B) C) D) E) Not enough information is given.
B) -Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________. A) B) C) D) E) Not enough information is given.
C) -Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________. A) B) C) D) E) Not enough information is given.
D) -Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________. A) B) C) D) E) Not enough information is given.
E) Not enough information is given.

F) A) and B)
G) B) and E)

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According to the Life Cycle and Permanent Income hypotheses,if future income rises permanently,current consumption:


A) falls.
B) rises.
C) does not change.
D) changes in proportion to interest rate changes.
E) Not enough information is given.

F) C) and D)
G) A) and E)

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According to the IS curve,when interest rates rise,__________ and __________.


A) governments borrow less;firms produce less
B) firms and households borrow more;firms produce less
C) firms and households borrow less;firms produce less
D) firms and households borrow more;firms produce more
E) firms and households borrow more;governments produce more

F) B) and D)
G) B) and C)

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Explain how the Permanent Income hypothesis can be used to explain "multiplier effects" in an economy.

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In the PIH model,consumption is a functi...

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Which of the following is (are) an example(s) of an aggregate demand shock? i.a change in interest rates ii.a change in tax policy iii.a natural disaster iv.a change in the price of oil


A) i
B) ii
C) iii
D) iv
E) ii and iii

F) B) and D)
G) None of the above

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Suppose the parameters of the IS curve are Suppose the parameters of the IS curve are , , and the real interest rate is initially R = 3%. (a)Is the economy in its long-term equilibrium? Explain. (b)Suppose the real interest rate falls to 2 percent;what happens to the short-run equilibrium,holding everything else constant? (c)What happens to the short-run equilibrium if falls 3 percent,holding everything else constant? , Suppose the parameters of the IS curve are , , and the real interest rate is initially R = 3%. (a)Is the economy in its long-term equilibrium? Explain. (b)Suppose the real interest rate falls to 2 percent;what happens to the short-run equilibrium,holding everything else constant? (c)What happens to the short-run equilibrium if falls 3 percent,holding everything else constant? , Suppose the parameters of the IS curve are , , and the real interest rate is initially R = 3%. (a)Is the economy in its long-term equilibrium? Explain. (b)Suppose the real interest rate falls to 2 percent;what happens to the short-run equilibrium,holding everything else constant? (c)What happens to the short-run equilibrium if falls 3 percent,holding everything else constant? and the real interest rate is initially R = 3%. (a)Is the economy in its long-term equilibrium? Explain. (b)Suppose the real interest rate falls to 2 percent;what happens to the short-run equilibrium,holding everything else constant? (c)What happens to the short-run equilibrium if Suppose the parameters of the IS curve are , , and the real interest rate is initially R = 3%. (a)Is the economy in its long-term equilibrium? Explain. (b)Suppose the real interest rate falls to 2 percent;what happens to the short-run equilibrium,holding everything else constant? (c)What happens to the short-run equilibrium if falls 3 percent,holding everything else constant? falls 3 percent,holding everything else constant?

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Begin with the IS curve: blured image .
(a...

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What is the relationship between the real interest rate and the output gap in the IS curve? Explain.

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There is an inverse ...

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Consider the following model of the IS curve without an international sector: Consumption: Consider the following model of the IS curve without an international sector: Consumption: ; Investment: ; Government expenditure: . With this formulation,the IS curve is horizontal. ; Investment: Consider the following model of the IS curve without an international sector: Consumption: ; Investment: ; Government expenditure: . With this formulation,the IS curve is horizontal. ; Government expenditure: Consider the following model of the IS curve without an international sector: Consumption: ; Investment: ; Government expenditure: . With this formulation,the IS curve is horizontal. . With this formulation,the IS curve is horizontal.

A) True
B) False

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