Author Question: For this question, assume that the Fed is expected to respond to any event by keeping output ... (Read 28 times)

nmorano1 · **on:** Jun 30, 2018

For this question, assume that the Fed is expected to respond to any event by keeping output constant (i.e., equal to its initial level). An unexpected increase in government spending will cause

A) stock prices to fall.
B) stock prices to rise.
C) no change in stock prices.
D) an ambiguous effect on stock prices.

Question 2

First, define the LM curve. Second, explain why it has its particular shape.

What will be an ideal response?

underwood14 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

The LM curve illustrates the combinations of the interest rate and level of output that maintain financial market equilibrium. The curve is upward sloping because as income increases, money demand will rise. This increase in money demand will cause an excess demand for money and an excess supply of bonds. Bond prices will fall and the interest rate will increase until equilibrium is restored.