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Author Question: An unexpected increase in the money supply will tend to cause A) an increase in stock prices. B) ... (Read 71 times)

abarnes

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on: Jun 30, 2018
An unexpected increase in the money supply will tend to cause
 
  A) an increase in stock prices.
  B) a reduction in stock prices.
  C) no change in stock prices.
  D) an ambiguous effect on stock prices.

Question 2

Graphically derive the IS curve from the goods market equilibrium.
 
  What will be an ideal response?


leahm14

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

A

Answer to Question 2

Suppose the initial equilibrium in the goods market is at point A with interest rate i. Suppose now that the interest rate increases from its initial value i to a higher value i'. The increase in the interest rate decreases investment. The decrease in investment leads to a decrease in output. Now the new equilibrium point is at A', with a higher value of i and lower value of Y. After we plot the combinations of i and Y when the goods market is in equilibrium, we can connect these two points (A and A') to get a downward sloping IS curve.


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