Makro chap 8-9

What does the IS curve represent?

The IS curve represents equilibrium in the goods market, derived from the equality of investment and savings.

What is the LM curve and how is it derived?

The LM curve represents equilibrium in the money market, derived from the equality of money demand and supply.

How do fiscal policies affect the IS-LM framework?

Fiscal policies shift the IS curve, such as increased government spending.

What is crowding out in economic terms?

Crowding out occurs when increased government spending raises interest rates, thereby reducing private investment.

How does a central bank set interest rates?

The central bank sets interest rates by adjusting the money supply to achieve desired output and inflation targets.

What does the Phillips Curve illustrate?

The Phillips Curve shows the inverse relationship between inflation and unemployment in the short run.

How do inflation expectations influence the Phillips Curve?

Adaptive or rational expectations shift the Phillips Curve, influencing its trade-off between inflation and unemployment.

What is the natural rate hypothesis?

The natural rate hypothesis states that inflation is stable only at the natural rate of unemployment, with no long-term trade-off.

What are common causes for shifts in the Phillips Curve?

Shifts in the Phillips Curve can be caused by supply shocks, changes in inflation expectations, and structural changes.