Applied Macroeconomics - Essay Example

iii. The decline in the personal savings rate of Americans will result in the shift of the IS Curve to the right. iv. A drop in business confidence following the collapse of the stock market will shift the IS Curve to the left.4. A change in which of the following would cause the LM curve to shift To rotate, To both shift and rotate Which of these do not affect the slope or position of the LM curve i. nominal money supply (Ms) affects the position of the LM curve. The increase in the nominal money supply would cause the LM curve to move to the right.ii. the responsiveness of the demand for money to the interest rate influences the slope of the LM curve.

The more responsive the demand fore money with regard to the interest rates level is, the less steep the slope of the LM curve will be.iii. the responsiveness of the demand for money to income also influences the slope of the curve. The more responsive the demand fore money to the income level is, the steeper the LM curve will be.iv. business and consumer confidence level changes have influence on the slope of the LM curve and, therefore, would cause the LM curve to rotate.v. interest rate (r) does not affect the position or slope of the LM curve.

The change in interest results in change in quantity of real balances demanded and results in movement along the LM curve.vi. price level (P) influences real money demand and, as a result shift the LM curve. If the price level increases, the real demand for money decreases and the LM curve shifts to the left. 5. Explain the concept of "crowding-out". Under what circumstances could government spending be "crowded-out" Do you think this is likely to be the case "Crowding-out" takes place when expansionary fiscal policy leads to the.

Increase in government spending, income tax cut or an investment subsidy will raise the interest rate if the quantity of money is unchanged. The IS Curve has negative slope because a higher level of the interest rate (vertical axis) reduces investment spending, thereby reducing aggregate demand and thus the equilibrium level of income (horizontal axis). The steepness of the curve's negative slope depends on how sensitive investment spending is to changes in the interest rate and also on the multiplier.

The movement along the IS Curve occurs with the changes in the level of the interest rate and corresponding change in the level of income. If interest rate increases, the equilibrium level of income decreases, and vice versa. ii. the responsiveness of the demand for money to the interest rate influences the slope of the LM curve. The more responsive the demand fore money with regard to the interest rates level is, the less steep the slope of the LM curve will be. "Crowding-out" takes place when expansionary fiscal policy leads to the increase in the interest rates level and, thus, reduces private spending, in particular investment.

This way increase in government spending "crowds-out" investment spending. Full "crowding-out" can occur under the condition of a vertical LM schedule when the fisc