Chapter 11

Question 1

IS-LM model

Answer 1

A model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market.

Question 2

IS curve

Answer 2

the negative relationship between the interest rate and the level of income that arises in the market for goods and services.

Question 3

LM curve

Answer 3

the positive relationship between the interest rate and the level of income (while holding the price level fixed) that arises in the market for real money balances.

Question 4

Keynesian cross

Answer 4

A simple model of income determination, based on the ideas of Keynes’s General Theory, which shows how changes in spending can have a multiplied effect on aggregate income.

Question 5

Government-purchases multiplier

Answer 5

the change in aggregate income resulting from a one-dollar change in government purchases.

Question 6

Tax multiplier

Answer 6

the change in aggregate income resulting from a one-dollar change in taxes.

Question 7

Theory of liquidity preference

Answer 7

A simple model of the interest rate, based on the ideas of Keynes’s General Theory, which says that the interest rate adjusts to equilibrate the supply and demand for real money balances.