Question 1

During the Great Depression, investment fell and the Fed allowed the money supply to fall. Show the effect on equilibrium output and the interest rate on an IS-LM graph.

Accepted Answer

The fall in investment shifts IS to the left and the fall in the money supply shifts LM to the left. Equilibrium output falls. The effect on the equilibrium interest rate is indeterminate.

Question 2

Monetary neutrality states that changes in the money supply affect only nominal variables.

Accepted Answer

A) True 
 B)False  True

Question 3

The graph above shows a central bank targeting an interest rate iT. This policy is said to be destabilizing since the change in output from _____ is greater than the change in output from

Accepted Answer

A)  A to B, B to C. 
B)  A to C, A to B. 
C)  A to C, B to C. 
D)  none of the above. 
A)  A to B, B to C. 
B)  A to C, A to B. 
C)  A to C, B to C. 
D)  none of the above. C

Question 4

If output starts at the natural rate, in the long run, changes in fiscal policy affect the interest rate but not output in the IS-LM model.

Accepted Answer

A) True 
 B)False

Question 5

The LM curve will shift to the left if output is_____ its natural rate.

Accepted Answer

A)  above 
B)  below 
C)  equal to 
D)  cannot be determined 
A)  above 
B)  below 
C)  equal to 
D)  cannot be determined

Question 6

The AD curve slopes upward because the LM curve shifts left.

Accepted Answer

A) True 
 B)False

Question 7

A decrease in the money supply causes the _____ curve to shift to the left and equilibrium output to

Accepted Answer

A)  LM, fall. 
B)  LM, rise. 
C)  IS, rise. 
D)  IS, rise 
A)  LM, fall. 
B)  LM, rise. 
C)  IS, rise. 
D)  IS, rise

Question 8

Show the effect of an increase in (autonomous) investment on an IS-LM graph (in the short run).

Accepted Answer

@#IMG-DLM& IS shifts to the ri

Question 9

An increase in the real money supply shifts the LM curve to the right.

Accepted Answer

A) True 
 B)False

Question 10

If the Federal Reserve wants to increase output, it increases

Accepted Answer

A)  G. 
B)  M/P. 
C)  i. 
D)  all of the above. 
A)  G. 
B)  M/P. 
C)  i. 
D)  all of the above.

Question 11

The price level will fall if output is _____ its natural rate.

Accepted Answer

A)  above 
B)  below 
C)  equal to 
D)  cannot be determined 
A)  above 
B)  below 
C)  equal to 
D)  cannot be determined

Question 12

The natural rate of output is the level of output where

Accepted Answer

A)  the price level has no tendency to change. 
B)  money supply growth is zero. 
C)  fiscal policy cannot shift the IS curve. 
D)  all of the above. 
A)  the price level has no tendency to change. 
B)  money supply growth is zero. 
C)  fiscal policy cannot shift the IS curve. 
D)  all of the above.

Question 13

If money is neutral, then a tax cut would have the effect of

Accepted Answer

A)  raising output. 
B)  raising the interest rate. 
C)  lowering the price level. 
D)  all of the above. 
A)  raising output. 
B)  raising the interest rate. 
C)  lowering the price level. 
D)  all of the above.

Question 14

Would a steeper LM curve imply more crowding out or less? Explain with a graph (and words).

Accepted Answer

@#IMG-DLM& The steeper LM2 cur

Question 15

The AD slopes down due to the affect of the price level on consumption.

Accepted Answer

A) True 
 B)False

Question 16

An increase in autonomous consumption shifts AD to the right.

Accepted Answer

A) True 
 B)False

Question 17

Crowding out refers to a diminishment of the output gain from fiscal stimulus due to

Accepted Answer

A)  a lower money supply. 
B)  higher interest rates. 
C)  higher price level. 
D)  all of the above. 
A)  a lower money supply. 
B)  higher interest rates. 
C)  higher price level. 
D)  all of the above.

Question 18

When the LM curve is unstable, an interest rate target will produce greater stability in output.

Accepted Answer

A) True 
 B)False

Question 19

During a financial panic, the use of Bagehot's Law is equivalent to the monetary authority targeting the _____ in the face of an unstable _____ curve.

Accepted Answer

A)  interest rate, IS 
B)  interest rate, LM 
C)  money supply, IS 
D)  money supply, LM 
A)  interest rate, IS 
B)  interest rate, LM 
C)  money supply, IS 
D)  money supply, LM

Question 20

The AD curve shifts in the same direction as the IS curve but the opposite direction from the LM curve.

Accepted Answer

A) True 
 B)False

Exam 22: Is-Lm in Action

During the Great Depression, investment fell and the Fed allowed the money supply to fall. Show the effect on equilibrium output and the interest rate on an IS-LM graph.

Monetary neutrality states that changes in the money supply affect only nominal variables.

The graph above shows a central bank targeting an interest rate iT. This policy is said to be destabilizing since the change in output from _____ is greater than the change in output from

If output starts at the natural rate, in the long run, changes in fiscal policy affect the interest rate but not output in the IS-LM model.

The LM curve will shift to the left if output is_____ its natural rate.

The AD curve slopes upward because the LM curve shifts left.

A decrease in the money supply causes the _____ curve to shift to the left and equilibrium output to

Show the effect of an increase in (autonomous) investment on an IS-LM graph (in the short run).

An increase in the real money supply shifts the LM curve to the right.

If the Federal Reserve wants to increase output, it increases

The price level will fall if output is _____ its natural rate.

The natural rate of output is the level of output where

If money is neutral, then a tax cut would have the effect of

Would a steeper LM curve imply more crowding out or less? Explain with a graph (and words).

The AD slopes down due to the affect of the price level on consumption.

An increase in autonomous consumption shifts AD to the right.

Crowding out refers to a diminishment of the output gain from fiscal stimulus due to

When the LM curve is unstable, an interest rate target will produce greater stability in output.

During a financial panic, the use of Bagehot's Law is equivalent to the monetary authority targeting the _____ in the face of an unstable _____ curve.

The AD curve shifts in the same direction as the IS curve but the opposite direction from the LM curve.

The Financial System

Money

Interest Rates

The Economics of Interest-Rate Fluctuations

The Economics of Interest-Rate Spreads and Yield Curves

Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

Financial Structure, Transaction Costs, and Asymmetric Information

Bank Management

Innovation and Structure in Banking and Finance

The Economics of Financial Regulation

Financial Derivatives

Financial Crises: Causes and Consequences

Central Bank Form and Function

The Money Supply Process and the Money Multipliers

Monetary Policy Tools

Monetary Policy Targets and Goals

Foreign Exchange

International Monetary Regimes

Money Demand

Is-Lm

Aggregate Supply and Demand and the Growth Diamond

Monetary Policy Transmission Mechanisms

Inflation and Money

Rational Expectations Redux: Monetary Policy Implications

Filters

The graph above shows a central bank targeting an interest rate i_T. This policy is said to be destabilizing since the change in output from _____ is greater than the change in output from

During a financial panic, the use of Bagehot's Law is equivalent to the monetary authority targeting the _ in the face of an unstable _ curve.