Explain what effect a reduction in the future expected interest ...

[Haya94]

Explain what effect a reduction in the future expected interest rate will have on the IS curve and LM curve in the current period.
 
  What will be an ideal response?

Question 2

The leverage ratio is the ratio of a bank's
 
  A) assets divided by its liabilities.
  B) income divided by its assets.
  C) assets divided by capital.
  D) capital divided by its total liabilities.

[Amiracle]

Answer to Question 1

A reduction in the future expected interest rate will cause an increase in the present value of future disposable income and, therefore, human wealth. This causes current C to increase and the IS curve to shift right. The reduction in the future expected rate will also cause an increase in the present value of future profits. This will cause an increase in investment and another rightward shift in the IS curve. The LM curve will not be affected.

Answer to Question 2

C

[Haya94]

Gracias!

[miss_1456@hotmail.com]

Thanks for the timely response, appreciate it