Question 1

Explain in detail what effect a decrease in government spending will have on: (1) the LM curve and (2) the IS curve.

Accepted Answer

A decrease in government spending causes a decrease in disposable income and consumption. The fall in consumption causes a decrease in demand and the equilibrium level of output in the goods market becomes lower. This is reflected in a leftward shift in the IS curve. If the central bank controls the money supply, goods market events such as lower government spending does not shift the LM curve (only a movement along it). However, if the central bank controls the interest rate, in response to the decrease in the interest rate as a result of the fiscal contraction, the central bank conducts open market sales of bonds to decrease the money stock to keep the interest rate constant. This has the effect of shifting the LM curve upwards until the same interest rate is attained.

Question 2

The IS curve will not shift when which of the following occurs?

Accepted Answer

A)  A decrease in government spending. 
B)  A decrease in firm confidence. 
C)  A decrease in consumer confidence. 
D)  A decrease in taxes. 
E)  A decrease in the interest rate. 
A)  A decrease in government spending. 
B)  A decrease in firm confidence. 
C)  A decrease in consumer confidence. 
D)  A decrease in taxes. 
E)  A decrease in the interest rate. E

Question 3

An increase in the budget deficit decreasing the level of investment is known as:

Accepted Answer

A)  the crowding out of investment. 
B)  the crowding out of the budget deficit. 
C)  the crowding in of investment. 
D)  the crowding out of output. 
E)  the crowding in of the budget deficit. 
A)  the crowding out of investment. 
B)  the crowding out of the budget deficit. 
C)  the crowding in of investment. 
D)  the crowding out of output. 
E)  the crowding in of the budget deficit. A

Question 4

Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that:

Accepted Answer

A)  the money market and goods market are in equilibrium and the bond market is not in equilibrium. 
B)  the money market and bond markets are in equilibrium and the goods market is not in equilibrium. 
C)  the goods market is in equilibrium and the money market is not in equilibrium. 
D)  the money, bond and goods markets are all in equilibrium. 
E)  neither the money, bond, nor goods markets are in equilibrium. 
A)  the money market and goods market are in equilibrium and the bond market is not in equilibrium. 
B)  the money market and bond markets are in equilibrium and the goods market is not in equilibrium. 
C)  the goods market is in equilibrium and the money market is not in equilibrium. 
D)  the money, bond and goods markets are all in equilibrium. 
E)  neither the money, bond, nor goods markets are in equilibrium.

Question 5

Which of the following statements is consistent with a given LM curve?

Accepted Answer

A)  An increase in output causes an increase in demand for goods. 
B)  An increase in the interest rate causes investment spending to decrease. 
C)  An increase in the interest rate causes money demand to decrease. 
D)  An increase in output causes an increase in money demand. 
E)  An increase in the interest rate causes a decrease in the money supply. 
A)  An increase in output causes an increase in demand for goods. 
B)  An increase in the interest rate causes investment spending to decrease. 
C)  An increase in the interest rate causes money demand to decrease. 
D)  An increase in output causes an increase in money demand. 
E)  An increase in the interest rate causes a decrease in the money supply.

Question 6

Suppose the economy is currently operating on both the IS curve and the LM curve. Which of the following is true for this economy?

Accepted Answer

A)  Financial markets are in equilibrium. 
B)  The money supply equals money demand. 
C)  Production equals demand. 
D)  The quantity supplied of bonds equals the quantity demanded for bonds. 
E)  All of the above. 
A)  Financial markets are in equilibrium. 
B)  The money supply equals money demand. 
C)  Production equals demand. 
D)  The quantity supplied of bonds equals the quantity demanded for bonds. 
E)  All of the above.

Question 7

Explain: (1) what happens to income, money demand, the interest rate, and output when an increase in government spending is implemented and (2) what happens to the position of the LM curve as a result of the fiscal expansion if the central bank controls the interest rate.

Accepted Answer

(1) A fiscal expansion such as an increa

Question 8

Explain (1) what happens to the interest rate, investment, demand, and output when the central bank pursues contractionary monetary policy and (2) what happens to the position of the IS curve as the central bank pursues contraction monetary policy.

Accepted Answer

(1) When the central bank pursues contra

Question 9

Assume that investment does not depend on the interest rate. An increase in the money supply will cause which of the following for this economy?

Accepted Answer

A)  A decrease in output. 
B)  An increase in the interest rate. 
C)  An increase in investment. 
D)  No change in investment. 
E)  A decrease in investment. 
A)  A decrease in output. 
B)  An increase in the interest rate. 
C)  An increase in investment. 
D)  No change in investment. 
E)  A decrease in investment.

Question 10

Which of the following describes the policy mix of the Gillard Labor government in Australia and the Reserve Bank of Australia in 2012?

Accepted Answer

A)  Fiscal expansion and monetary expansion. 
B)  Fiscal expansion and monetary contraction. 
C)  Fiscal expansion and tax contraction. 
D)  Fiscal contraction and monetary expansion. 
E)  Fiscal contraction and monetary contraction. 
A)  Fiscal expansion and monetary expansion. 
B)  Fiscal expansion and monetary contraction. 
C)  Fiscal expansion and tax contraction. 
D)  Fiscal contraction and monetary expansion. 
E)  Fiscal contraction and monetary contraction.

Question 11

We know with certainty that a tax hike must cause which of the following?

Accepted Answer

A)  An increase in output. 
B)  A decrease in investment. 
C)  No change in output. 
D)  A decrease in output. 
E)  An increase in the interest rate. 
A)  An increase in output. 
B)  A decrease in investment. 
C)  No change in output. 
D)  A decrease in output. 
E)  An increase in the interest rate.

Question 12

Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know with certainty that this combination of policies must cause:

Accepted Answer

A)  an increase in i. 
B)  a decrease in Y. 
C)  a decrease in M. 
D)  a decrease in i. 
E)  an increase in Y. 
A)  an increase in i. 
B)  a decrease in Y. 
C)  a decrease in M. 
D)  a decrease in i. 
E)  an increase in Y.

Question 13

An increase in consumer confidence will likely have which of the following effects?

Accepted Answer

A)  A rightward shift in the IS curve. 
B)  A leftward shift in the IS curve. 
C)  An upward shift in the LM curve. 
D)  A downward shift in the LM curve. 
E)  A rightward shift in the IS curve and an upward shift in the LM curve. 
A)  A rightward shift in the IS curve. 
B)  A leftward shift in the IS curve. 
C)  An upward shift in the LM curve. 
D)  A downward shift in the LM curve. 
E)  A rightward shift in the IS curve and an upward shift in the LM curve.

Question 14

Suppose there is a simultaneous tax increase and open market purchase of bonds. Which of the following must occur as a result of this policy mix?

Accepted Answer

A)  Output decreases. 
B)  Output increases. 
C)  The interest rate increases. 
D)  The interest rate decreases. 
E)  Both output and the interest rate increase. 
A)  Output decreases. 
B)  Output increases. 
C)  The interest rate increases. 
D)  The interest rate decreases. 
E)  Both output and the interest rate increase.

Question 15

A reasonable dynamic assumption for the IS- LM model is that:

Accepted Answer

A)  the economy is always on the LM curve, but moves only slowly to the IS curve. 
B)  the output market is quick to adjust, but the money market adjusts more slowly. 
C)  the economy is always on both the IS and LM curves. 
D)  adjustment to the new IS- LM equilibrium is instantaneous after an LM shift, but not after an IS shift. 
E)  the economy is always on the IS curve, but moves only slowly to the LM curve. 
A)  the economy is always on the LM curve, but moves only slowly to the IS curve. 
B)  the output market is quick to adjust, but the money market adjusts more slowly. 
C)  the economy is always on both the IS and LM curves. 
D)  adjustment to the new IS- LM equilibrium is instantaneous after an LM shift, but not after an IS shift. 
E)  the economy is always on the IS curve, but moves only slowly to the LM curve.

Question 16

Assume that investment does not depend on the interest rate. A decrease in government spending will cause which of the following for this economy?

Accepted Answer

A)  An increase in the interest rate. 
B)  An increase in output. 
C)  No change in investment. 
D)  An increase in investment. 
E)  A decrease in investment. 
A)  An increase in the interest rate. 
B)  An increase in output. 
C)  No change in investment. 
D)  An increase in investment. 
E)  A decrease in investment.

Question 17

A decrease in consumer confidence will likely have which of the following effects?

Accepted Answer

A)  A rightward shift in the IS curve. 
B)  A leftward shift in the IS curve. 
C)  An upward shift in the LM curve. 
D)  A downward shift in the LM curve. 
E)  A rightward shift in the IS curve and an upward shift in the LM curve. 
A)  A rightward shift in the IS curve. 
B)  A leftward shift in the IS curve. 
C)  An upward shift in the LM curve. 
D)  A downward shift in the LM curve. 
E)  A rightward shift in the IS curve and an upward shift in the LM curve.

Question 18

Suppose there is a simultaneous tax cut and open market purchase of bonds. Which of the following must occur as a result of this?

Accepted Answer

A)  Output increases. 
B)  Output decreases. 
C)  The interest rate increases. 
D)  The interest rate decreases. 
E)  Both output and the interest rate increase. 
A)  Output increases. 
B)  Output decreases. 
C)  The interest rate increases. 
D)  The interest rate decreases. 
E)  Both output and the interest rate increase.

Question 19

Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a decrease in government spending:

Accepted Answer

A)  causes an increase in output and has no effect on the interest rate. 
B)  has no effect on output. 
C)  has no effect on investment. 
D)  causes investment to increase. 
E)  causes investment to decrease. 
A)  causes an increase in output and has no effect on the interest rate. 
B)  has no effect on output. 
C)  has no effect on investment. 
D)  causes investment to increase. 
E)  causes investment to decrease.

Question 20

Use the IS- LM model to answer this question and assume that the central bank controls the interest rate. Suppose there is a simultaneous increase in taxes and interest rate cut. Explain what effect this particular policy mix will have on output and the money supply. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.

Accepted Answer

In this case, the LM curve shifts down a

Exam 5: Goods and Financial Markets: the Islm Model

Explain in detail what effect a decrease in government spending will have on: (1) the LM curve and (2) the IS curve.

The IS curve will not shift when which of the following occurs?

An increase in the budget deficit decreasing the level of investment is known as:

Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that:

Which of the following statements is consistent with a given LM curve?

Suppose the economy is currently operating on both the IS curve and the LM curve. Which of the following is true for this economy?

Explain: (1) what happens to income, money demand, the interest rate, and output when an increase in government spending is implemented and (2) what happens to the position of the LM curve as a result of the fiscal expansion if the central bank controls the interest rate.

Explain (1) what happens to the interest rate, investment, demand, and output when the central bank pursues contractionary monetary policy and (2) what happens to the position of the IS curve as the central bank pursues contraction monetary policy.

Assume that investment does not depend on the interest rate. An increase in the money supply will cause which of the following for this economy?

Which of the following describes the policy mix of the Gillard Labor government in Australia and the Reserve Bank of Australia in 2012?

We know with certainty that a tax hike must cause which of the following?

Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know with certainty that this combination of policies must cause:

An increase in consumer confidence will likely have which of the following effects?

Suppose there is a simultaneous tax increase and open market purchase of bonds. Which of the following must occur as a result of this policy mix?

A reasonable dynamic assumption for the IS- LM model is that:

Assume that investment does not depend on the interest rate. A decrease in government spending will cause which of the following for this economy?

A decrease in consumer confidence will likely have which of the following effects?

Suppose there is a simultaneous tax cut and open market purchase of bonds. Which of the following must occur as a result of this?

Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a decrease in government spending:

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Consumption and Investment

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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