Economics

Front 1

What two economic forces/variables are always equal in the aggregate?

Back 1

Income and Output

Front 2

What are the three markets that the system is divided into?

Back 2

Money Market, Goods Market and Financial Asset Market

Front 3

How many markets have to be in equilibrium for the assumption to be made that all three are in equilibrium?

Back 3

Two

Front 4

What is the IS curve focused on?

Back 4

Goods Market

Front 5

What are the conditions for the goods market to be in equilibrium?

Back 5

Investment spending = savings and total spending = total output

Front 6

What relationship is established by the IS curve?

Back 6

relationship between interest rates and income/output

Front 7

IS curve (definition)

Back 7

Represents all combinations of interest rates and income where the goods market is in equilibrium (where investment spending = savings, expenditures = production and supply = demand)

Front 8

Which way does the IS curve slope?

Back 8

down sloping from left to right (\)

Front 9

Output = ? (equation)

Back 9

Output = Consumer Spending + Investment Spending (Y=C+I)

Front 10

(Re: IS curve) What is the relationship between interest rates and investments

Back 10

Inverse

Front 11

Steep IS curve

Back 11

Not responsive to interest rate, highly sensitive to income

Front 12

Shallow IS curve

Back 12

Highly responsive to interest rate, not sensitive to income

Front 13

What are on the axis of the IS curve

Back 13

Vertical- Interest rates
Horizontal- Aggregate Output/Income (always the same)

Front 14

LM Curve (definition)

Back 14

The LM curve shows all combinations of the interest rates and income where the money market is in equilibrium

Front 15

What is the LM curve focused on

Back 15

Money Market

Front 16

What is true when the money market is in equilibrium?

Back 16

supply for money equals the demand for money.

Front 17

Which direction does the LM curve slope?

Back 17

Upward sloping from left to right (/).

Front 18

What is fixed along the LM curve?

Back 18

Supply of money.

Front 19

(RE: LM curve) What is the relationship between Income and Interest rates?

Back 19

Directly related

Front 20

What does an increase in the money supply do to the LM curve?

Back 20

Shifts the LM curve out

Front 21

What does a decrease in the money supply do to the LM curve?

Back 21

Shifts the LM curve in

Front 22

How is the demand for money related to the interest rate? to income?

Back 22

Inversely related to interest rate but directly related to income.

Front 23

When is the LM curve the steepest?

Back 23

When the demand for money tends to be relatively insensitive to interest rates.

Front 24

Interest Rate is a function of what two things?

Back 24

Demand for money and investment spending

Front 25

When is the LM curve steep?

Back 25

If the demand for money is very responsive to changes in income.

Front 26

When is the LM curve shallow?

Back 26

If the demand for money is highly sensitive to changes in interest rate

Front 27

What does the intersection of the IS & LM curves represent?

Back 27

They are both in equilibrium. It also shows equilibrium interest rate and equilibrium income/output.

Front 28

What variables influence the demand for money?

Back 28

Changes in income and interest rate

Front 29

What variables are influenced by interest rates? and what is the relationship

Back 29

Demand for money (inverse)and investment spending (direct)

Front 30

What does the IS/LM model assume

Back 30

The Interest rates are the only determinant of investment

Front 31

What is the Equilibrium Interest Rate

Back 31

Equilibrium interest rate is the interest rate at which the quantity of money demanded equals the quantity of money supplied. Increase in income and increase in demand for money is directly related. It causes equilibrium interest rate to increase.

Front 32

How is inflation fixed in economy?

Back 32

It uses fiscal policy by increasing taxes and/or a decrease in government spending.

Front 33

When is Fiscal policy most effective?

Back 33

Fiscal policy is most effective when the IS curve is steep and the LM curve is flat. Fiscal policy is highly effective in Liquidity Trap.

Front 34

When is Fiscal policy least effective?

Back 34

Fiscal policy is least effective when LM curve is steep or nearly vertical. Also, Fiscal policy is ineffective when crowding out takes place. When there is expansion in government spending, it raises interest rates

Front 35

How does expansionary fiscal policy shift the IS curve?

Back 35

Expansionary fiscal policy shifts the IS curve to the right

Front 36

How does a contractionary fiscal policy shift the IS curve?

Back 36

Contractionary fiscal policy shifts the IS curve to the left

Front 37

When is fiscal policy highly effective and monetary policy ineffective?

Back 37

IS curve is steep or nearly vertical

Front 38

When is monetary policy is most effective?

Back 38

Monetary policy is most effective when the IS curve is flat and LM curve is steep.

Front 39

When is monetary policy is least effective?

Back 39

Monetary policy is least effective when the LM curve is horizontal or flat; when the IS curve is steep or nearly vertical

Front 40

What does expansionary monetary policy do to the LM curve?

Back 40

Expansionary monetary policy that increases the money supply shifts the LM curve out (to the right).

Front 41

What does contractionary monetary policy do to the LM curve?

Back 41

Contractionary monetary policy (decreases in the money supply) shifts the LM curve in (to the left).

Front 42

How will changes in the money supply affect the IS and LM curves?

Back 42

An increase in money supply will cause the LM curve to shift down and a decrease to shift up. The IS curve is the opposite. Or increase in money supply shifts IS curve out and decrease shifts it back in.

Front 43

What does the LM curve look like in Liquidity trap?

Back 43

LM curve is flat.

Front 44

What does the Liquidity trap do to interest rates?

Back 44

Puts a floor under interest rates are regardless of changes in money supply interest rates will not drop beneath that level

Front 45

What's the effectiveness of govt policies in Liquidity trap?

Back 45

Fiscal policy is highly effective in a liquidity trap and monetary policy is least effective in a liquidity trap

Front 46

When does liquidity trap occur?

Back 46

When a floor is set and interest rates can’t go lower

Front 47

What is the result of government cutting taxes and increasing government spending? (in terms of shifting curves)

Back 47

IS curve shifts out (to the right).

Front 48

How does the government shift the economy to Full employment equilibrium?

Back 48

by shifting the IS curve out.

Front 49

What is the result of government decreasing spending? (in terms of shifting curves)

Back 49

The IS curve shifts in (to the left).

Front 50

In the IS/LM framework, decreases in taxes and/or increases in government spending impact?

Back 50

Shift the IS curve OUT and changes the equilibrium income

Front 51

What factors might influence the effectiveness of economic policy and create problems using IS/LM curve to predict problems in the real world?

Back 51

implementation and interpretation

Front 52

What lags (delays) the influence or the effectiveness of policy changes?

Back 52

Information lag
Implementation lag

Front 53

Other problems with the effectiveness of policy change?

Back 53

Uncertainty, Expectations: policy creates outcomes based on what people think is going to happen in the future. Full employment is not an exact point, there is no way to pinpoint exactly what our potential output really is.

Front 54

Economic Policy of the 1980’s

Back 54

Contradictory. Tight money, expansionary fiscal policy