Econ 101: Aggregate Demand and IS-LM Model

What is the relationship described by the consumption function?

The relationship between consumption and disposable income (correct)
The relationship between GDP and government policy variables
The relationship between savings and taxes
The relationship between investment and government expenditure

What is the purpose of the life-cycle model of consumption?

To reduce wealth in order to lower consumption
To discourage people from saving for retirement
To encourage immediate spending rather than saving for retirement
To model people's tendency to save in order to smooth their consumption over their lifetime (correct)

What is the mirror image of the consumption function?

The tax function
The savings function (correct)
The investment function
The GDP function

What does the Permanent Income Hypothesis state?

If the income change is clearly transitory, a significant fraction of the additional income may be saved (A) Signup and view all the answers

What does the wealth effect refer to?

Higher wealth leads to higher consumption (C) Signup and view all the answers

What is the focus of this lecture?

Developing the IS–LM model (D) Signup and view all the answers

According to the Keynesian Cross model, what determines an economy's total income in the short run?

Spending plans of households, businesses, and government (B) Signup and view all the answers

In the IS-LM model, what does a horizontal SRAS curve represent?

A fixed price level in the short run (B) Signup and view all the answers

Who is credited as the father of macroeconomics in relation to the Keynesian Cross model?

John Maynard Keynes (A) Signup and view all the answers

According to the Keynesian Cross model, what happens when there is an increase in spending plans?

Firms can sell more goods and services (B) Signup and view all the answers

What is the primary focus of the IS-LM model?

Determining the equilibrium level of income and interest rate (C) Signup and view all the answers

What does the Keynesian Cross model propose about an economy's total income?

It is determined by the spending plans of households, businesses, and government (A) Signup and view all the answers

What is the significance of a horizontal SRAS curve in the IS-LM model?

It signifies a perfectly elastic supply of goods and services (C) Signup and view all the answers

According to John Maynard Keynes, what drives an increase in total output in the short run?

An increase in aggregate demand (A) Signup and view all the answers

How does the IS-LM model address changes in monetary policy?

By analyzing the effects of changes in money supply on investment and consumption (B) Signup and view all the answers

In the Keynesian Cross model, what does the consumption function specifically describe?

The relationship between consumption and disposable income (B) Signup and view all the answers

What is the purpose of the Permanent Income Hypothesis in the Keynesian Cross model?

To study how people's perception of income changes affects their consumption behavior (D) Signup and view all the answers

What does the mirror image of the consumption function, known as the savings function, specifically describe?

The relationship between savings and disposable income (A) Signup and view all the answers

In the context of the Keynesian Cross model, what does the Life-Cycle Model of Consumption assume about people's savings behavior?

People save primarily to smooth their consumption over their lifetime (A) Signup and view all the answers

What is the implied impact of mandatory social security, as per the Life-Cycle Model of Consumption in the Keynesian Cross model?

It decreases savings by middle-aged workers due to the retirement income supplement (B) Signup and view all the answers