Intermediate Macroeconomic Analysis (Econ 174)
Drake University, Spring 2002
William M. Boal

www.drake.edu/cbpa/econ/boal/174

william.boal@drake.edu

HOMEWORK ASSIGNMENT 5
Answer Key

Problem (1), Mankiw chapter 11, pages 305-306.

Interest rate Income Consumption Investment
a. The central bank increases the money supply. decrease increase increase increase
b. The government increases government purchases. increase increase increase decrease
c. The government increases taxes. decrease decrease decrease increase
d. The government increases government purchases and taxes by equal amounts. [Note: The government-purchases multiplier is bigger than the tax-cut multiplier!] increase increase no change decrease

Problem (2), Mankiw chapter 11, pages 305-306.

Interest rate Income Consumption Investment What the Fed should do
a. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems. increase increase increase increase decrease
b. A wave of credit-card fraud increases the frequency with which people make transactions in cash. increase decrease decrease decrease increase
c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving. decrease decrease decrease increase increase

Problem (5), Mankiw chapter 11, pages 305-306.

  1. The right mix of policy would be an increase in the money supply, which would shift the LM curve to the right, and a decrease in spending or an increase in taxes, which would shift the IS curve to the left.
  2. The policy mix in the early 1980s was exactly the opposite of part (a). So the policy mix in the early 1980s would have raised the interest rate and decreased investment.

[end of answer key]