Page 157 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Self Assessment

Multiple Choice Questions:
4. Which of these is not related to a closed economy?
(a) Expenditures on goods and services can exist only in the form of business expenditure
and investment goods.
(b) Consumption is a function of income
(c) Investment is exogenous

(d) Investment is a function of the rate of interest
5. ............................. is also called the commodity market equilibrium schedule.
(a) Investment schedule (b) Income schedule
(c) IS-curve (d) LM-curve
6. An IS-curve has a ................................... slope.

(a) Positive (b) Negative
(c) Concave (d) Convex
7. If autonomous spending increases, the IS-curve will .............................

(a) Shift to the right (b) Shift to the left
(c) Not shift at all (d) Indefinitely
8. The position of the IS-curve depends on ......................................
(a) Income (b) Interest rate
(c) Government expenditure (d) Autonomous expenditure

9.3 Money Market Equilibrium – LM-curve

The financial market refers to the market in which money, bonds, stocks and other forms of
income earning assets are traded. Here we restrict ourselves to the money market. To study
equilibrium in the money market, we have to refer to both sides of the market – the supply side
and demand side. The supply (or nominal quantity) of money is determined by the Central
Bank.

!
Caution “Equilibrium in the money market exists when the demand for money is equal to
the supply of money.”
In Keynesian theory, demand for money is split into two parts – the transactions demand (m )
1
and the speculative demand (m ). The transaction demand is assumed to be proportional to the
2
level of income.
m = kY
1
The speculative demand for money is assumed to be an inverse function of the rate of interest,
i.e.,
m = h(i)
2

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