Shifts in Economy

Question 1

productivity (increase)

Answer 1

ND increase

FE right

Question 2

margin­al product of labor (increase)

Answer 2

ND increase

FE right

Question 3

capitaI stock (increase)

Answer 3

ND increase

FE right

Question 4

wealth (increase)

Answer 4

NS decrease (Income Effect)
FE left  (Classical)

Increase in wealth increases amount of leisure workers can afford .

S decreases
Md increases

Question 5

future wage (increase)

Answer 5

NS decrease (Income Effect)
FE left (Classical)

Increase in expected future real wage increases amount of leisure workers
can afford.

Question 6

Working-age population (increase)

Answer 6

NS increase
FE right (Classical)

Question 7

Labor Participation Rate (increase)

Answer 7

NS increase
FE right (Classical)

Question 8

ND increase shifts

Answer 8

1 productivity (increase)
2 capital stock (increase)

Question 9

NS increase shifts

Answer 9

1 wealth (decrease)
2 future income (decrease)
3 population (increase)
4 participation rate (increase)

Question 10

current output Y (increases)

Answer 10

Savings (increases)

S (increases)

Question 11

expected future output Yf (increases)

Answer 11

S decreases
IS increases

Anticipation of future income raises current desired consumption, lowering current
desired saving.

Question 12

Wealth (increases)

Answer 12

S decreases
IS increases

Some of the extra wealth is consumed, which reduces saving for given income.

NS decrease
Md increases

Question 13

expected real interest rate r (increases)

Answer 13

S probably rises (substitution effect)

An increased return makes saving more attractive, probably outweighing the fact that
less must be saved to reach a specific savings target.

income effect (borrower):  S increase
income effect (lender): S decrease

Question 14

Government purchases (increase) G

Answer 14

S fall
IS increases

Higher government purchases directly lower desired national saving.

Question 15

Taxes increase

Answer 15

S increases if no RE
S unchanged if RE
IS decreases

saving rises if consumers don’t take into account a
future tax cut and thus reduce current consumption.

Question 16

Savings S increase shifts

Answer 16

1 Y increase
2 Yf decreases
3 wealth decreases
4 expected real interest rate increases
5 G decreases
6 T increase

Question 17

investment increase I

Answer 17

1 real interest rate decreases r
2 effective tax rate decreases t
3 expected future MPK increases

MPK f = uc/ (1-t)
uc = (r+d)pk/(1-t)
so uc increase generally increases investment curve

pk = price of new capital good 
r = interest 
d = depreciation

Question 18

real interest rate increase

Answer 18

investment decrease

The user cost increases, which reduces desired capital stock.

Md falls

Question 19

effective tax rate increases

Answer 19

investment decreases

IS shifts left decreases

Question 20

expected future MPK increases

Answer 20

investment increases

IS increases

Question 21

Md increase shifts

Money Demand

Answer 21

1 Price level P (increase)
2 Real income Y (increase)
3 real interest rate r (decrease)
4 expected inflation (decrease)
Md = P x L(Y, i )
i = r + inflation

5 nominal interest rate on money (increase)
6 wealth (increase)
7 risk of alternative assets (increase)
8 risk of money (decreases)
9 liquidity of alternative assets (decrease)
10 efficiency of payment technologies (decrease)

Question 22

Price level P (increase)

Answer 22

Ms Shifts, not md
Md rises proportionally
LM left

Question 23

Real income Y (increase)

Answer 23

Md rises less than proportionally

LM left

Question 24

Real interest rate r (increase)

Answer 24

Md falls
LM right
Investment I decreases

Question 25

expected inflation (increases)

Answer 25

Md falls | LM right

Question 26

nominal interest rate on money im (increase)

Answer 26

Md rises | LM left

Question 27

wealth (increase)

Answer 27

Md increases LM left part of increase in wealth can be held in form of money S decreases NS decrease

Question 28

risk of alternative assets (increase)

Answer 28

Md rises | LM left

Question 29

risk of Money (increase)

Answer 29

Md decreases | LM right

Question 30

liquidity of alternative assets (increase)

Answer 30

Md falls | LM right

Question 31

liquidity of Money (increases_

Answer 31

Md increases | LM left

Question 32

factors that shift FE right

Answer 32

1 beneficial supply shock 2 increase in labor supply 3 increase in capital stock

Question 33

savings curve (increase)

Answer 33

IS shifts left

Question 34

factors the shift IS curve right

Answer 34

``` 1 expected future output (increase) 2 wealth (increase) 3 government purchases G (increase) 4 taxes T (decrease) RE 5 future MPK (increase) 6 effective tax rate on capital (decrease) ```

Question 35

investment curve (increase)

Answer 35

IS shifts left

Question 36

factors that shift LM curve right

Answer 36

1 nominal money supply M (increase) 2 Price level P (decrease) 3 Expected inflation (increase) 4 nominal interest rate on money im (decrease) 5 any other thing decreasing Md decrease wealth, decease risk of alternative assets, increase liquidity of alternative assets, increase in efficiency of payment technologies

Question 37

Md money demand falls

Answer 37

LM right

Question 38

M rises money supply

Answer 38

LM left

Question 39

IS right | AD?

Answer 39

AD right

Question 40

LM right

Answer 40

AD right

Question 41

AD right shifts

Answer 41

``` 1 IS right - S decrease or I increase - expected future output (increase) - wealth (increase) - G (increase) - T (decrease) -future MPK (increase) - effective tax rate on capital (decreases) 2 LM right - Md decrease or M increase - M nominal money supply (increase) - expected inflation (increase) - nominal interest rate on money (decrease) - risk of assets (decrease) - risk of money (increase) ```

Question 42

temporary wage increase

Answer 42

NS increases (substitution effect)