Explain why current consumption is likely to respond less than ...

[mynx]

Explain why current consumption is likely to respond less than one for one to changes in current income.
 
  What will be an ideal response?

Question 2

A fiscal expansion (e.g. a tax cut) will result in an increase in income, an increase in money demand, and an increase in the equilibrium interest rate in financial markets. Explain what happens to the position of the LM curve as policy makers pursue expansionary fiscal policy.
 
  What will be an ideal response?

[maya.nigrin17@yahoo.com]

Answer to Question 1

A change in current income is not likely to be viewed with certainty as permanent. So, part of any change in temporary income will be saved and, therefore, consumption will increase by an amount less than the change in income. If the change were permanent, the change in C would be greater.

Answer to Question 2

The fiscal expansion will cause an increase in output. However, changes in Y only cause movements along the LM curve. The effects of changes in Y on the interest rate are embedded in the shape of the LM curve.

[mynx]

Thank you

[maya.nigrin17@yahoo.com]

No problemo