Question 1

When the LM curve is horizontal,

Accepted Answer

A)  fiscal policy has no impact on equilibrium income. 
B)  fiscal policy has no impact on the equilibrium interest rate. 
C)  the economy is at full employment. 
D)  monetary policy has no impact on equilibrium income. 
A)  fiscal policy has no impact on equilibrium income. 
B)  fiscal policy has no impact on the equilibrium interest rate. 
C)  the economy is at full employment. 
D)  monetary policy has no impact on equilibrium income.

Question 2

In the ISLM framework, monetary policy has the greatest impact on equilibrium income when

Accepted Answer

A)  money demand = money supply. 
B)  money demand is infinitely elastic. 
C)  the interest rate is low. 
D)  the investment function is highly interest-sensitive. 
A)  money demand = money supply. 
B)  money demand is infinitely elastic. 
C)  the interest rate is low. 
D)  the investment function is highly interest-sensitive.

Question 3

A higher price level causes us to

Accepted Answer

A)  move up along an aggregate demand curve. 
B)  move down along an aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left. 
A)  move up along an aggregate demand curve. 
B)  move down along an aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left.

Question 4

Along an IS curve as income levels __________, saving is smaller, so the interest rate must be __________ to reduce the level of investment so it will be equal to saving.

Accepted Answer

A)  increase; higher 
B)  increase; lower 
C)  decrease; higher 
D)  decrease; lower 
A)  increase; higher 
B)  increase; lower 
C)  decrease; higher 
D)  decrease; lower

Question 5

The slope of the LM curve will be steeper the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

Accepted Answer

A)  less; less 
B)  less; greater 
C)  greater; less 
D)  greater; greater 
A)  less; less 
B)  less; greater 
C)  greater; less 
D)  greater; greater

Question 6

Assume that the Cambridge k = 0.25. If the transactions demand for money is equal to $20,000, then income is equal to

Accepted Answer

A)  $20,000. 
B)  $80,000. 
C)  $10,000. 
D)  $5,000. 
A)  $20,000. 
B)  $80,000. 
C)  $10,000. 
D)  $5,000.

Question 7

If the velocity of money is completely insensitive to changes in the rate of interest, the

Accepted Answer

A)  LM curve will be horizontal. 
B)  LM curve will be vertical. 
C)  IS curve will be horizontal. 
D)  IS curve will be vertical. 
A)  LM curve will be horizontal. 
B)  LM curve will be vertical. 
C)  IS curve will be horizontal. 
D)  IS curve will be vertical.

Question 8

In the ISLM framework, the impact of monetary policy on equilibrium income is less when

Accepted Answer

A)  money demand = money supply. 
B)  money demand is infinitely elastic. 
C)  the interest rate is low. 
D)  the investment function has lower interest-sensitivity. 
A)  money demand = money supply. 
B)  money demand is infinitely elastic. 
C)  the interest rate is low. 
D)  the investment function has lower interest-sensitivity.

Question 9

Along an LM curve at lower interest rates there is __________ money demanded, so income must be lower to __________ the demand for transactions balances if the total demand for money is to equal the fixed supply.

Accepted Answer

A)  less; decrease 
B)  less; increase 
C)  more; decrease 
D)  more; increase 
A)  less; decrease 
B)  less; increase 
C)  more; decrease 
D)  more; increase

Question 10

The slope of the IS curve is influenced by the

Accepted Answer

A)  speculative demand for money. 
B)  transactions demand for money. 
C)  velocity of money. 
D)  marginal propensity to consume. 
A)  speculative demand for money. 
B)  transactions demand for money. 
C)  velocity of money. 
D)  marginal propensity to consume.

Question 11

If companies decrease investment spending because of lower expected returns on projects, forecasters should anticipate (everything else the same)that

Accepted Answer

A)  GDP will rise. 
B)  the money supply will fall. 
C)  interest rates will fall. 
D)  saving will increase. 
A)  GDP will rise. 
B)  the money supply will fall. 
C)  interest rates will fall. 
D)  saving will increase.

Question 12

With a rise in government expenditure we

Accepted Answer

A)  move up along an aggregate demand curve. 
B)  move down along an aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left. 
A)  move up along an aggregate demand curve. 
B)  move down along an aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left.

Question 13

Along an LM curve at lower income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 14

The flatter is the LM curve

Accepted Answer

A)  the more effective is fiscal policy. 
B)  the less effective is fiscal policy. 
C)  the less is the interest sensitivity of saving. 
D)  the less is the interest sensitivity of the money supply. 
A)  the more effective is fiscal policy. 
B)  the less effective is fiscal policy. 
C)  the less is the interest sensitivity of saving. 
D)  the less is the interest sensitivity of the money supply.

Question 15

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be higher to equal the higher level of investment.

Accepted Answer

A)  decline; lower 
B)  decline; higher 
C)  increase; lower 
D)  increase; higher 
A)  decline; lower 
B)  decline; higher 
C)  increase; lower 
D)  increase; higher

Question 16

Complete crowding out occurs when the

Accepted Answer

A)  IS curve is horizontal. 
B)  IS curve is vertical. 
C)  LM curve is horizontal. 
D)  LM curve is vertical. 
A)  IS curve is horizontal. 
B)  IS curve is vertical. 
C)  LM curve is horizontal. 
D)  LM curve is vertical.

Question 17

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to an increase in GDP.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 18

The LM curve represents combinations of income and the interest rate at which

Accepted Answer

A)  money demand equals money supply when the money supply is fixed. 
B)  money supply equals money demand when the money demand is fixed. 
C)  money demand equals money supply when the money supply can vary. 
D)  money supply equals money demand when both the money supply and money demand can vary. 
A)  money demand equals money supply when the money supply is fixed. 
B)  money supply equals money demand when the money demand is fixed. 
C)  money demand equals money supply when the money supply can vary. 
D)  money supply equals money demand when both the money supply and money demand can vary.

Question 19

Suppose k = 0.25. With a $10 billion decrease in the money supply, the LM curve shifts

Accepted Answer

A)  to the left by $40 billion. 
B)  to the left by $4 billion. 
C)  to the left by $2.5 billion. 
D)  to the right by $0.25 billion. 
A)  to the left by $40 billion. 
B)  to the left by $4 billion. 
C)  to the left by $2.5 billion. 
D)  to the right by $0.25 billion.

Question 20

With a decrease in government expenditure we

Accepted Answer

A)  move up along the aggregate demand curve. 
B)  move down along the aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left. 
A)  move up along the aggregate demand curve. 
B)  move down along the aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left.

Exam 24: The ISLM World

When the LM curve is horizontal,

In the ISLM framework, monetary policy has the greatest impact on equilibrium income when

A higher price level causes us to

Along an IS curve as income levels __________, saving is smaller, so the interest rate must be __________ to reduce the level of investment so it will be equal to saving.

The slope of the LM curve will be steeper the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

Assume that the Cambridge k = 0.25. If the transactions demand for money is equal to $20,000, then income is equal to

If the velocity of money is completely insensitive to changes in the rate of interest, the

In the ISLM framework, the impact of monetary policy on equilibrium income is less when

Along an LM curve at lower interest rates there is __________ money demanded, so income must be lower to __________ the demand for transactions balances if the total demand for money is to equal the fixed supply.

The slope of the IS curve is influenced by the

If companies decrease investment spending because of lower expected returns on projects, forecasters should anticipate (everything else the same)that

With a rise in government expenditure we

Along an LM curve at lower income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

The flatter is the LM curve

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be higher to equal the higher level of investment.

Complete crowding out occurs when the

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to an increase in GDP.

The LM curve represents combinations of income and the interest rate at which

Suppose k = 0.25. With a $10 billion decrease in the money supply, the LM curve shifts

With a decrease in government expenditure we

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

Along an IS curve as income levels , saving is smaller, so the interest rate must be to reduce the level of investment so it will be equal to saving.

The slope of the LM curve will be steeper the is the income-sensitivity of the demand for money and the is the interest-sensitivity of the demand for money.

Along an LM curve at lower interest rates there is money demanded, so income must be lower to the demand for transactions balances if the total demand for money is to equal the fixed supply.

Along an LM curve at lower income levels the transactions demand for money is , so the interest rate must be to equate the demand to the fixed supply of money.

Along an IS curve as interest rates , income must be so that saving, which is a positive function of income, can be higher to equal the higher level of investment.

The IS curve has a positive slope because a(n) in the interest rate leads to a(n) in desired investment and this leads to an increase in GDP.