Author Question: Suppose individuals expect future output to be lower and future interest rates to be lower. Given ... (Read 121 times)

saraeharris · **on:** Jun 30, 2018

Suppose individuals expect future output to be lower and future interest rates to be lower. Given this information, how will individuals alter consumption in the current period? Explain.

What will be an ideal response?

Question 2

Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a reduction in consumer confidence will have on output, the interest rate, and investment.

What will be an ideal response?

Sassygurl126 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The effects are ambiguous. The reduction in future Y will reduce human wealth and cause C to decrease. The decrease in future rates will increase the present value of future disposable income and increase C.

Answer to Question 2

A reduction in consumer confidence will cause a reduction in consumption and, therefore, a reduction in demand and a leftward shift in the IS curve. As Y decreases, money demand will decrease causing the interest rate to fall. The effects on I are ambiguous. The lower Y will cause I to fall while the lower interest rate will cause I to increase.