Answer to Question #212432 in Macroeconomics for Critical

Question

2. Continue with the same equations,

What is the value of the simple multiplier (with taxes)

By how much does an increase in government spending of ∆G increase the level of income in this model, which includes the money market?

By how much does a change in government spending of ∆G affect the equilibrium interest rate?

3. How does an increase in the tax rate affect the IS curve?

How does the increase affect the equilibrium level of income?

4. Show that a given change in the money stock has a larger effect on output the less interest sensitive is the demand for money.

(b) How does the respond of the interest rate to a change in the money stock depend on the interest sensitivity of money demand?

Answer 1

Question 2

The expenditure multiplier is positive, while the tax multiplier is negative. This is because a rise in aggregate expenditures raises real GDP, but an increase in taxes lowers it. A boost in aggregate demand is predicted as a result of increased government spending (AD). In the short run, this could lead to increased growth. It has the potential to cause inflation. The aggregate demand for products is greater than the aggregate supply of goods with increasing levels of government spending.

Question 3

The IS curve is shifted when taxes are raised. The economy travels along the LM curve, not the LM curve shifts. When taxes are raised, consumption falls, resulting in a drop in output/income. When taxes are raised, consumption falls, resulting in a drop in output/income. The desire for money is reduced when income falls. Given that the supply of money is fixed, the interest rate must fall to maintain equilibrium by increasing the demand for money.

Question 4

a) Because the IS curve decides, monetary policy does not affect output.

b) An increase in Y raises money demand. If money demand is particularly sensitive to interest rates, a little increase in the interest rate can lower money demand and bring the money market back into balance.