Question

Explain very briefly if the following statements are true or false. Mathematical or graphic treatment will be appreciated wherever possible or necessary.

8. A rise in the propensity to consume, implying an increase in the multiplier, rotates the IS curve anti-clockwise and makes it flatter.

9. A fall in the interest-sensitivity of investment function rotates the IS curve anti-clockwise and make it flatter.

10. A rise in the interest sensitivity of the demand for money has no effect on the intercept of the LM curve with the y-axis; it shifts the intercept with the vertical axis upward, rotating it clockwise direction about the horizontal intercept and making it flatter.

11. Given nominal money supply, a rise in the price level shifts the LM curve leftward with no change in the slope.

Answer 1

8.The IS curve is derived from the investment schedule and so the slope of the IS curve is determined by the rate of interest. An increase in the mpc will cause an increase in the multiplier and so the IS curve will shift rightwards. There will be no rotation. This is False.

9. A fall in the interest sensitivity will mean that interest elasticity falls. The IS curve will then become steeper as interest rate changes makes smaller changes in investment. This is False.

10. This is True. A rise in the interest sensitivity of money will mean that the Lm curve will become flatter as a small change in the interest rates causes a large change in the demand for money. The Lm curve will thus be flatter. This is True.

11. This is True. A rise in the price level given fixed money supply will mean that the supply of money function shifts to the left and so increases the interest rate. The Lm curve will thus shift leftwards causing a rise in the interest rates with no change to the slope. This is True.