`IS-LM

Question 1

what does IS-LM describe?

Answer 1

equilibrium in goods market and the money market and together determines general equilibrium in the economy

Question 2

what does IS stand for?

Answer 2

Investment and savings

Question 3

what does LM stand for?

Answer 3

liquidity and money

Question 4

what links the goods and money marekts?

Answer 4

the rate of interest

Question 5

what is aggregate expenditure?

Answer 5

the total amount of goods and services that people want to buy
across the whole economy. It is the sum of four components

Question 6

what is aggregate expenditure the sum of?

Answer 6

consumption + planned investment + government purchases + net exports

Question 7

what is the real interest rate?

Answer 7

the opportunity cost of spending money this year

Question 8

where is the IS curve derived from?

Answer 8

the Keynesian cross diagram

Question 9

what does the IS curve show?

Answer 9

an inverse relationship between the interest rate and output

Question 10

the slope of the IS curve depends on what?

Answer 10

how responsive consumption and investment expenditures are to changes in interest rates and on the size of the multiplier

Question 11

how do shifts in the IS curve come about?

Answer 11

as a result of changes in autonomous expenditure

Question 12

A rise in government spending, independent of any change in
interest rates, would lead to a shift of the IS curve to which side?

Answer 12

the right

Question 13

a fall in exports would lead to a shift of the IS curve to what side?

Answer 13

the left

Question 14

what are investments?

Answer 14

the purchase of new capital, such as equipment or buildings

Question 15

If a person spends less than they earn and uses the rest either put in a bank, or to buy stocks or investment funds, economists call this?

Answer 15

saving

Question 16

what is national saving?

Answer 16

the total income in the economy that remains after paying for consumption and government purchase

Question 17

what is private saving?

Answer 17

the amount of income that households have left after paying their taxes and paying for their consumption

Question 18

what is public saving?

Answer 18

the amount of tax revenue that the government has left after paying for its spending

Question 19

why does the government run a budget surplus?

Answer 19

because it receives more money than it spends

Question 20

why does the government run a budget deficit?

Answer 20

because it spends more money than it receives in tax revenue

Question 21

what is the market for loanable funds?

Answer 21

the market in which those who want to save supply funds and those who want to borrow to invest demand funds.

Question 22

what are loanable funds?

Answer 22

all income that people have chosen to save and lend out, rather than use for their own consumption.

Question 23

where does the supply of loanable funs come from?

Answer 23

people who have extra income they want to save and lend out.

Question 24

where does the demand for loanable funds come from?

Answer 24

households and firms that wish to borrow to make investments.

Question 25

what does the interest rate represent?

Answer 25

the amount that borrowers pay for loans and the amount that lenders receive on their saving

Question 26

what is the interest rate in the market for loanable funds?

Answer 26

the real interest rate

Question 27

what is government debt?

Answer 27

The accumulation of past budget deficits

Question 28

what does government borrowing to finance its budget deficit do?

Answer 28

reduces the supply of loanable funds available to finance investment by households and firms

Question 29

what does the term ‘crowding out’ mean?

Answer 29

The deficit borrowing crowds out private borrowers who are trying to finance investments

Question 30

what does a budget surplus do?

Answer 30

increases the supply of loanable funds,
reduces the interest rate, and stimulates investment

Question 31

what does a budget deficit do?

Answer 31

decreases the supply of loanable fund

Question 32

why is the demand for money downward sloping?

Answer 32

1. transaction motive
2. precautionary motive
3. speculative motive

Question 33

what is a transaction motive?

Answer 33

the need to keep cash to use it when you see something you want to buy, and not have to wait to convert savings (bond?) to liquid form

Question 34

what is a precautionary motive?

Answer 34

hold money in case of emergency

Question 35

what is a speculative motive?

Answer 35

have money on hand to take advantage of a good investment opportunity that presents itself

Question 36

what does the LM curve having a positive slope show?

Answer 36

that an increase in income is associated with an increase in the interest rate and vice versa

Question 37

where is the equilibrium in the IS-LM found?

Answer 37

where the IS curve intersects the LM curve