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Author Question: Suppose individuals expect future output to be higher and future interest rates to be higher. Given ... (Read 116 times)

storky111

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on: Jun 30, 2018
Suppose individuals expect future output to be higher and future interest rates to be higher. Given this information, how will individuals alter consumption in the current period? Explain.
 
  What will be an ideal response?

Question 2

Explain in detail what effect a reduction in government spending will have on: (1 ) the LM curve; and (2 ) the IS curve.
 
  What will be an ideal response?


robbielu01

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Reply #1 on: Jun 30, 2018
Answer to Question 1

The effects are ambiguous. The increase in future Y will increase human wealth and cause C to increase. The increase in future rates will reduce the present value of future disposable income and reduce C.

Answer to Question 2

A reduction in taxes will cause an increase in disposable income and an increase in consumption. The rise in C will cause an increase in demand and the equilibrium level of output in the goods market will be higher. This is reflected in a rightward shift in the IS curve. Goods market events such as this will not cause a shift in the LM curve (only a movement along it).


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