Explain why the new IS curve that takes into account expectations ...

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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.

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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

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TYSM

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Excellent