Question 1

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

Accepted Answer

An increase in the money supply will dec

Question 2

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by .

Accepted Answer

A) $1 billion; more than $1 billion 
B) $.75 billion; more than $.75 billion 
C) $.75 billion; $.75 billion 
D) $1 billion; $1 billion 
A) $1 billion; more than $1 billion 
B) $.75 billion; more than $.75 billion 
C) $.75 billion; $.75 billion 
D) $1 billion; $1 billion

Question 3

The LM curve generally determines:

Accepted Answer

A) income. 
B) the interest rate. 
C) both income and the interest rate. 
D) neither income nor the interest rate. 
A) income. 
B) the interest rate. 
C) both income and the interest rate. 
D) neither income nor the interest rate.

Question 4

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.

Accepted Answer

A) positively; positively 
B) positively; negatively 
C) negatively; negatively 
D) negatively; positively 
A) positively; positively 
B) positively; negatively 
C) negatively; negatively 
D) negatively; positively

Question 5

An increase in the interest rate:

Accepted Answer

A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects. 
B) increases planned investment, because people who make money from interest have more money to invest. 
C) has no effect on investment. 
D) may be caused by a drop in investment demand. 
A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects. 
B) increases planned investment, because people who make money from interest have more money to invest. 
C) has no effect on investment. 
D) may be caused by a drop in investment demand.

Question 6

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is percent.

Accepted Answer

A) 2 
B) 4 
C) 6 
D) 8 
A) 2 
B) 4 
C) 6 
D) 8

Question 7

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Accepted Answer

A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier. 
B) lower equilibrium income by the decrease in the intercept. 
C) raise equilibrium income by the decrease in the intercept. 
D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier. 
A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier. 
B) lower equilibrium income by the decrease in the intercept. 
C) raise equilibrium income by the decrease in the intercept. 
D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Question 8

An increase in income raises money and the equilibrium interest rate.

Accepted Answer

A) demand; raises 
B) demand; lowers 
C) supply; raises 
D) supply; lowers 
A) demand; raises 
B) demand; lowers 
C) supply; raises 
D) supply; lowers

Question 9

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

Accepted Answer

A) 350. 
B) 400. 
C) 600. 
D) 750. 
A) 350. 
B) 400. 
C) 600. 
D) 750.

Question 10

The interest rate affects which variable in the market for goods and services versus the market for real money balances?
b. The level of income affects which variable in the market for goods and services versus the market for real money balances?

Accepted Answer

a. The interest rate affects investment

Question 11

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

Accepted Answer

A) decrease equilibrium income by ∆T. 
B) decrease equilibrium income by ∆T/(1 - MP
C) . 
C) decrease equilibrium income by (∆T)(MP
C) /(1 - MP
C) . 
D) not affect equilibrium income at all. 
A) decrease equilibrium income by ∆T. 
B) decrease equilibrium income by ∆T/(1 - MP
C) . 
C) decrease equilibrium income by (∆T)(MP
C) /(1 - MP
C) . 
D) not affect equilibrium income at all.

Question 12

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services."
a. In the IS-LM model, will a tax cut change the money supply in the economy? Does a
change in the money supply shift the IS or the LM curve?
b. In the IS-LM model, does a tax cut shift the IS or the LM curve?
c. Based on your Answer s in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?

Accepted Answer

a. Tax cuts do not change the money supp

Question 13

The IS curve plots the relationship between the interest rate and that arises in the market for .

Accepted Answer

A) national income; goods and services 
B) the price level; goods and services 
C) national income; money 
D) the price level; money 
A) national income; goods and services 
B) the price level; goods and services 
C) national income; money 
D) the price level; money

Question 14

An explanation for the slope of the LM curve is that as:

Accepted Answer

A) the interest rate increases, income becomes higher. 
B) the interest rate increases, income becomes lower. 
C) income rises, money demand rises, and a higher interest rate is required. 
D) income rises, money demand rises, and a lower interest rate is required. 
A) the interest rate increases, income becomes higher. 
B) the interest rate increases, income becomes lower. 
C) income rises, money demand rises, and a higher interest rate is required. 
D) income rises, money demand rises, and a lower interest rate is required.

Question 15

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditures rises to the:

Accepted Answer

A) right with a slope less than one. 
B) right with a slope greater than one. 
C) left with a slope less than one. 
D) left with a slope greater than one. 
A) right with a slope less than one. 
B) right with a slope greater than one. 
C) left with a slope less than one. 
D) left with a slope greater than one.

Question 16

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for , and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

Accepted Answer

A) saving and investment; planned spending 
B) real-money balances; loanable funds 
C) goods and services; real-money balances 
D) real-money balances; goods and services 
A) saving and investment; planned spending 
B) real-money balances; loanable funds 
C) goods and services; real-money balances 
D) real-money balances; goods and services

Question 17

When firms experience unplanned inventory accumulation, they typically:

Accepted Answer

A) build new plants. 
B) lay off workers and reduce production. 
C) hire more workers and increase production. 
D) call for more government spending. 
A) build new plants. 
B) lay off workers and reduce production. 
C) hire more workers and increase production. 
D) call for more government spending.

Question 18

For the purposes of the Keynesian cross, planned expenditure consists of:

Accepted Answer

A) planned investment. 
B) planned government spending. 
C) planned investment and government spending. 
D) planned investment, government spending, and consumption expenditures. 
A) planned investment. 
B) planned government spending. 
C) planned investment and government spending. 
D) planned investment, government spending, and consumption expenditures.

Question 19

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

Accepted Answer

A) sell interest-earning assets in order to obtain non-interest-bearing money. 
B) purchase interest-earning assets in order to reduce holdings of non-interest- bearing money. 
C) purchase fewer goods and services. 
D) be content with their portfolios. 
A) sell interest-earning assets in order to obtain non-interest-bearing money. 
B) purchase interest-earning assets in order to reduce holdings of non-interest- bearing money. 
C) purchase fewer goods and services. 
D) be content with their portfolios.

Question 20

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

Accepted Answer

A) lower the interest rate. 
B) raise the interest rate. 
C) have no effect on the interest rate. 
D) first lower and then raise the interest rate. 
A) lower the interest rate. 
B) raise the interest rate. 
C) have no effect on the interest rate. 
D) first lower and then raise the interest rate.

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by .

The LM curve generally determines:

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.

An increase in the interest rate:

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is percent.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

An increase in income raises money and the equilibrium interest rate.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

The interest rate affects which variable in the market for goods and services versus the market for real money balances? b. The level of income affects which variable in the market for goods and services versus the market for real money balances?

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

The IS curve plots the relationship between the interest rate and that arises in the market for .

An explanation for the slope of the LM curve is that as:

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditures rises to the:

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for , and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

When firms experience unplanned inventory accumulation, they typically:

For the purposes of the Keynesian cross, planned expenditure consists of:

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

Money and Inflation

The Open Economy

Unemployment

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand II: Applying the Is-Lm Model

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

Stabilization Policy

Government Debt and Budget Deficits

Introduction to the Financial System

Asset Prices and Interest Rates

Securities Markets

Banking

Financial Crises

Filters

Exam 10: Aggregate Demand I: Building the Is-Lm Model

Explain why an increase in the money supply, which is a change in the money market, will upset the equilibrium in the goods market.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by .

The LM curve generally determines:

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.

An increase in the interest rate:

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is percent.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

An increase in income raises money and the equilibrium interest rate.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

The interest rate affects which variable in the market for goods and services versus the market for real money balances? b. The level of income affects which variable in the market for goods and services versus the market for real money balances?

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

The IS curve plots the relationship between the interest rate and that arises in the market for .

An explanation for the slope of the LM curve is that as:

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditures rises to the:

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for , and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

When firms experience unplanned inventory accumulation, they typically:

For the purposes of the Keynesian cross, planned expenditure consists of:

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

The Science of Macroeconomics

The Data of Macroeconomics

National Income: Where It Comes From and Where It Goes

Money and Inflation

The Open Economy

Unemployment

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand II: Applying the Is-Lm Model

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

Stabilization Policy

Government Debt and Budget Deficits

Introduction to the Financial System

Asset Prices and Interest Rates

Securities Markets

Banking

Financial Crises

Filters