True or False 33. Using the IS – LM framework, in which model would monetary pol
ID: 1197906 • Letter: T
Question
True or False
33. Using the IS – LM framework, in which model would monetary policy be more
effective (in terms of increasing the level of income)? THINK IT THROUGH
A. I = f (i) S = f (Y) G = G o
B. I = f (i) S = f (Y) G = G o – g (i)
34. Using the IS – LM framework, in which model would monetary policy produce larger
income changes (per unit of monetary stimulus)? THINK IT THROUGH
A. Tx = Tx o
B. Tx = T o + tY t > 0
35. Based on the equation of exchange, an increase in government spending can increase
income if and only if it is financed by an increase in the money supply.
39. The asset (liquidity preference, or speculative) motive/demand for money relates primarily to money’s medium of exchange function.
40. A Keynesian would view expansionary monetary policy as having its impact primarily through its effect on interest rates and thus consumption.
Explanation / Answer
(33) (B)
In option B, as i increases (decreases), Investment decreases (increases), reducing Y. But with increase (decraese) in i, g(i) increases & G decreases. This also reduces Y. So a change in i will impact Y from two components of demand (I & G) which together move in the opposite direction of change in i. So monetary policy will be more effective because, a change in interest rate will impact Y through 2 of aggregate demand components and not only Investment as in case (A).
(34) (A)
In case A, tax is autonomous but in case B, a part of total tax varies positively with income. So, when a monetary stimulus is introduced, which increases Y, in the 2nd case a part of the increase in Y is reduced due to higher tax payment. So net increase in Y will be lower in case B.
(35) False.
Equation of exchange is
Money Supply, M x Velocity of Money, V = Price Level, P x Real GDP, Y
When government spending increases, Y increases. It can take place if P decreases (keeping right hand side of equation unchanged), or if M increases (equally increasing both sides of equation) or if V increases (equally increasing both sides of equation). Either of the 3 possibilities is possible.
(39) False.
Speculative demand for money is the demand for financial capital which requires cash for usinng to reap benefits from investments. Money is used as a Store of Value, not as medium of exchange.
(40) True.
Keynesian economics is demand-driven and therefore proposes a change in demand through its components (consumption, investment, government spending or net exports).
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