(Answer Options of \"Increases\", \"Decreases\" and \"Does not change\") Assume

Question

(Answer Options of "Increases", "Decreases" and "Does not change")

Assume the model: And pay attention to the model in answering the questions

Y = C + I + G + X - M
C = a + b Y d where a > 0 and 0 < b < 1
I = f (i) but I f (Y) ie, MPI = 0
G = G o
Ms = Ms o Ms = money supply/stock
Tx = Tx o …….. meaning that Tx f ( Y )
Md = Mt(Y)+ M l (i) [Mt = transactions demand; M l = liquidity preference demand]
X = X o X = exports
M = M o + mY where M o is autonomous imports, and m is the marginal propensity to import

In each of the following cases, indicate the effect of the given
autonomous change (or policy measure) on each of the listed
variables. In each case indicate whether the listed variable
increases in value, decreases, or does not change.

Note: Answer beside the listed variable. For example, if in I an
increase in the money supply does not bring about a change interest
rates, write “does not change” beside “interest rates” at I, 1.
And if an increase in the money supply causes a decrease in the
level of income, write “decreases” beside “level of income” at I, 2

I. An increase in the money supply:
1. Interest rates
2. Level of income
3. Imports
4. Investment
5. Government spending

II. A decrease in the public’s liquidity preference:
6. Level of income
7. Investment
8. Saving
9. Consumption
10. Exports

III. An increase in the marginal propensity to import:
11. Income
12. Amount of money demanded for transactions purposes
13. Bond prices
14. Saving
15. Investment
16. Consumption
17. Money supply
18. Exports

IV. An increase in exports:
19. Income
20. Interest rates
21. Imports
22. Money supply

V. A simultaneous and equal increase in taxes and government
spending:
23. Level of income
24. Interest rates
25. Investment

Explanation / Answer

I. An increase in the money supply:
1. Interest rates - Decreases
2. Level of income – Increases in value
3. Imports – Does nit change
4. Investment – Increases in value
5. Government spending - increase in value

II. A decrease in the public’s liquidity preference:
6. Level of income – does not affect
7. Investment – decreases
8. Saving – increases
9. Consumption – decreases
10. Exports – does not affect

III. An increase in the marginal propensity to import:
11. Income - increases
12. Amount of money demanded for transactions purposes - increases
13. Bond prices – decreases
14. Saving – decreases
15. Investment – decreases
16. Consumption - increases
17. Money supply – does not affects
18. Exports – decreases

IV. An increase in exports:
19. Income – increases
20. Interest rates – does not affects
21. Imports - increases
22. Money supply - increases

V. A simultaneous and equal increase in taxes and government
spending:
23. Level of income – increases
24. Interest rates - increases
25. Investment – increases

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