Graphs

Question 1

What does the IS curve represent?

Answer 1

Combinations of interest rates and output where the goods market is in equilibrium (Investment = Saving)

The IS curve is downward-sloping in the (Y, i) space.

Question 2

What is the interpretation of the IS curve?

Answer 2

Higher interest rates lead to lower investment, reducing output.

Question 3

What does the LM curve show?

Answer 3

Combinations of interest rates and output where the money market is in equilibrium (Money Demand = Money Supply)

The LM curve is upward-sloping in the (Y, i) space.

Question 4

What is the interpretation of the LM curve?

Answer 4

Higher output increases money demand, leading to higher interest rates.

Question 5

What does the IS-LM model determine?

Answer 5

Simultaneous equilibrium in both goods and money markets.

Question 6

What happens when fiscal policy increases government spending?

Answer 6

Shifts the IS curve rightward, leading to higher output and interest rates.

Question 7

What is the effect of an increase in money supply on the LM curve?

Answer 7

Shifts the LM curve rightward, leading to lower interest rates and higher output.

Question 8

What does the consumption function illustrate?

Answer 8

The relationship between consumption (C) and disposable income (Yd).

Question 9

What does the slope of the consumption function represent?

Answer 9

The marginal propensity to consume (MPC).

Question 10

Describe the relationship between investment and interest rates.

Answer 10

Inverse relationship; higher interest rates reduce investment.

Question 11

What does the money demand curve depict?

Answer 11

The relationship between money demand and interest rates.

Question 12

What is the interpretation of the money demand curve?

Answer 12

Higher interest rates reduce the demand for money.

Question 13

What do the wage-setting (WS) and price-setting (PS) curves determine?

Answer 13

Real wages and employment in the labor market.

Question 14

What does the Phillips Curve illustrate?

Answer 14

The inverse relationship between inflation and unemployment.

Question 15

What is the interpretation of the Phillips Curve?

Answer 15

Lower unemployment leads to higher inflation and vice versa.

Question 16

What does the modified Phillips Curve incorporate?

Answer 16

Expectations, showing how expected inflation and unemployment gap affect actual inflation.

Question 17

What is determined by the intersection of WS and PS curves?

Answer 17

The natural rate of unemployment.

Question 18

What does the AD-AS model combine?

Answer 18

Aggregate Demand (AD) and Aggregate Supply (AS) to determine equilibrium output and price level.

Question 19

What does a rightward shift of the AD curve indicate?

Answer 19

Expansionary policy.

Question 20

What does a leftward shift of the AD curve indicate?

Answer 20

Contractionary policy.

Question 21

What causes the AS curve to shift?

Answer 21

Changes in expected prices or wages.

Question 22

What does the IS-LM-PC model show?

Answer 22

How inflation and output adjust over time.

Question 23

What does the equation of the Phillips Curve represent?

Answer 23

π_t = π_{t-1} + α(Y_t - Y_n).

Question 24

What happens when output is above potential in the Phillips Curve equation?

Answer 24

Inflation rises.

Question 25

What does the dynamic adjustment of inflation illustrate?

Answer 25

Shows how persistent demand shocks affect inflation.

Question 26

What does the output gap vs. inflation change graph show?

Answer 26

Bigger output gaps drive faster inflation increases.

Question 27

What lesson does the Volcker Experiment illustrate?

Answer 27

Tight monetary policy reduces inflation but causes short-run output losses.

Question 28

What does the expectations-augmented Phillips curve equation include?

Answer 28

π_t = π^e_t + α(Y_t - Y_n).

Question 29

What is the difference between anticipated and unanticipated policy?

Answer 29

Anticipated: Agents adjust behavior; Unanticipated: Temporarily moves output/inflation.

Question 30

What does the time-inconsistency diagram illustrate?

Answer 30

Output-inflation trade-off and inflation bias due to discretion.

Question 31

How does real depreciation affect net exports?

Answer 31

Improves net exports.

Question 32

What happens to the IS curve in an open economy when net exports increase?

Answer 32

IS shifts right.

Question 33

What does the interest parity condition equation represent?

Answer 33

i = i^* + (E^e - E)/E.

Question 34

What is the key insight of the Dornbusch model?

Answer 34

Exchange rates overreact in the short run due to sticky prices.

Question 35

What does the UIP diagram show?

Answer 35

Positive relationship between domestic interest rates and expected depreciation.