Author Question: Explain why current consumption might change even if current income does not change. What will be ... (Read 67 times)

lilldybug07 · **on:** Jun 30, 2018

Explain why current consumption might change even if current income does not change.

What will be an ideal response?

Question 2

Explain in detail what effect a Fed sale of bonds will have on: (1 ) the LM curve; and (2 ) the IS curve.

What will be an ideal response?

AngeliqueG · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C also depends on wealth. If any of the determinants of wealth change, without current disposable income changing, individuals will change current consumption. In short, there are other determinants of current consumption.

Answer to Question 2

A Fed sale of bonds will cause a reduction in H and a reduction in the money supply. This will cause an excess demand for money and the interest rate must increase to restore money market equilibrium. The LM curve will shift up as a result of this to reflect the now higher interest rate. The IS curve does not shift as a result of this. We would simply observe a movement along the IS curve.