First, define the LM curve. Second, explain why it has its particular shape
What will be an ideal response?
The LM curve illustrates the combinations of the interest rate and level of output that maintain financial market equilibrium. The curve is upward sloping because as income increases, money demand will rise. This increase in money demand will cause an excess demand for money and an excess supply of bonds. Bond prices will fall and the interest rate will increase until equilibrium is restored.
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Suppose you rent an apartment and are worried about a break-in that results in theft of your property. Suppose your monthly consumption level is currently $4,000 but a break-in would result in you having to finance your purchase of replacement property -- and this would reduce your current consumption to $2,000 per month. There is a 10% chance of a break-in. a. On a graph with "consumption" on the horizontal and "utility" on the vertical axis, illustrate a utility/consumption relationship that is consistent with risk averse tastes. b. On your graph, illustrate the utility in the "good" state, the utility in the "bad" state and the expected utility of facing the gamble. c. Which of these changes when the probability of a break-in increases to 20%?
d. A renter's insurance policy consists of a premium p and a benefit level b. What is (b,p) for full, actuarily fair insurance before and after the increase in risk? e. True or False: You are more likely to buy actuarily fair full insurance after the increase in risk than before. What will be an ideal response?
All of the following statements are true except
A. Until 1971 the United States had run a trade surplus virtually every year of the 20th century. B. The U.S. ran relatively small trade deficits through most of the 19th century. C. The U.S. was the only industrial power to raise tariffs during the 1930s. D. World trade in the 1930s dwindled to a fraction of what it had been in the 1920s.