Author Question: Income per worker has been A) converging in both the rich countries and the poor countries. B) ... (Read 249 times)

RODY.ELKHALIL · **on:** Jun 30, 2018

Income per worker has been

A) converging in both the rich countries and the poor countries.
B) converging in the rich countries, but not converging in the poor countries.
C) converging in the poor countries, but not converging in the rich countries.
D) converging in neither the poor nor the rich countries.

Question 2

For simplicity, the IS model assumes that neither net exports nor net taxes vary with income. A more realistic (and complicated) model would drop such assumptions. How would the behavior of the IS curve differ in the more realistic model?

What will be an ideal response?

debra928 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

In a more realistic model, increases in income would result in both more imports being purchased and more taxes being paid. The purchase of imports instead of domestic output lessens the impact of expenditure changes on inventories and, thus, on equilibrium output. Shifts of the IS curve in response to changes in autonomous spending would be smaller. Taxes that rise with income reduce the size of changes in consumption spending in response to output changes, so again shifts of the IS curve are smaller. Changes in the real interest rate change expenditures, but the effect on output is reduced to the extent that imports and taxes are changing, so the more realistic IS curve is steeper than the curve in the text.