Author Question: Explain why the new IS curve that takes into account expectations is likely steeper than the ... (Read 114 times)

bobbysung · **on:** Jun 30, 2018

Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.

What will be an ideal response?

Question 2

Which of the following statements are true?

A) A bank's assets are its sources of funds.
B) A bank's liabilities are its uses of funds.
C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
D) A bank's balance sheet indicates whether or not the bank is profitable.

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

Answer to Question 1

There are several factors that determine the size of the slope of the IS curve: the multiplier and the interest rate sensitivity of investment. The multiplier is now smaller because changes in current Y do not have as large an effect on current C. So, the mpc is smaller, the multiplier smaller, and the IS curve steeper. Also, a drop in the interest rate that is now temporary will not cause I to increase as much so the IS curve will be steeper. In the original IS-LM model, changes in Y and the interest rate were implicitly assumed permanent.

Answer to Question 2

C