Question 1

In the money market, an increase in the money supply:

Accepted Answer

A) lowers income. 
B) raises income. 
C) has no effect on income. 
D) lowers velocity. 
A) lowers income. 
B) raises income. 
C) has no effect on income. 
D) lowers velocity.

Question 2

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve:

Accepted Answer

A) is vertical. 
B) is horizontal. 
C) slopes upward and to the right. 
D) slopes downward and to the right. 
A) is vertical. 
B) is horizontal. 
C) slopes upward and to the right. 
D) slopes downward and to the right.

Question 3

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

Accepted Answer

A) increases by 250. 
B) increases by more than 250. 
C) decreases by 250. 
D) increases but by less than 250. 
A) increases by 250. 
B) increases by more than 250. 
C) decreases by 250. 
D) increases but by less than 250.

Question 4

Along an IS curve all of the following are always true except:

Accepted Answer

A) planned expenditures equal actual expenditures. 
B) planned expenditures equal income. 
C) the demand for real balances equals the supply of real balances. 
D) there are no unplanned changes in inventories. 
A) planned expenditures equal actual expenditures. 
B) planned expenditures equal income. 
C) the demand for real balances equals the supply of real balances. 
D) there are no unplanned changes in inventories.

Question 5

Exhibit: Market for Real Money Balances   Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____.

Accepted Answer

A) sell; rise 
B) sell; fall 
C) buy; rise 
D) buy; fall 
A) sell; rise 
B) sell; fall 
C) buy; rise 
D) buy; fall

Question 6

One argument in favour of tax cuts over spending-based fiscal stimulus is that:

Accepted Answer

A) tax cuts increase the MPC by a larger amount than government spending. 
B) tax cuts temporarily increase planned spending, but government spending permanently increases private spending. 
C) in theory the tax multiplier is larger than the government spending multiplier. 
D) historically tax cuts have been more successful than spending-based fiscal stimulus. 
A) tax cuts increase the MPC by a larger amount than government spending. 
B) tax cuts temporarily increase planned spending, but government spending permanently increases private spending. 
C) in theory the tax multiplier is larger than the government spending multiplier. 
D) historically tax cuts have been more successful than spending-based fiscal stimulus.

Question 7

An LM curve shows combinations of:

Accepted Answer

A) taxes and government spending. 
B) nominal money balances and price levels. 
C) interest rates and income, which bring equilibrium in the market for real money balances. 
D) interest rates and income, which bring equilibrium in the market for goods and services. 
A) taxes and government spending. 
B) nominal money balances and price levels. 
C) interest rates and income, which bring equilibrium in the market for real money balances. 
D) interest rates and income, which bring equilibrium in the market for goods and services.

Question 8

The simple investment function shows that investment _____ as _____ increases.

Accepted Answer

A) decreases; the interest rate 
B) increases; the interest rate 
C) decreases; government spending 
D) increases; government spending 
A) decreases; the interest rate 
B) increases; the interest rate 
C) decreases; government spending 
D) increases; government spending

Question 9

According to the theory of liquidity preference, the supply of real money balances:

Accepted Answer

A) decreases as the interest rate increases. 
B) increases as the interest rate increases. 
C) increases as income increases. 
D) is fixed by the central bank. 
A) decreases as the interest rate increases. 
B) increases as the interest rate increases. 
C) increases as income increases. 
D) is fixed by the central bank.

Question 10

The demand for money helps determine the equilibrium level of the interest rate, even though holding money does not earn any interest income. How is this possible?

Accepted Answer

a.Tax cuts do not change the money suppl

Question 11

The intersection of the IS and LM curves determines the values of:

Accepted Answer

A) r, Y, and P, given G, T, and M. 
B) r, Y, and M, given G, T, and P. 
C) r and Y, given G, T, M, and P. 
D) p and Y, given G, T, and M. 
A) r, Y, and P, given G, T, and M. 
B) r, Y, and M, given G, T, and P. 
C) r and Y, given G, T, M, and P. 
D) p and Y, given G, T, and M.

Question 12

The theory of liquidity preference states that the quantity of real money balances demanded is:

Accepted Answer

A) negatively related to both the interest rate and income. 
B) positively related to both the interest rate and income. 
C) positively related to the interest rate and negatively related to income. 
D) negatively related to the interest rate and positively related to income. 
A) negatively related to both the interest rate and income. 
B) positively related to both the interest rate and income. 
C) positively related to the interest rate and negatively related to income. 
D) negatively related to the interest rate and positively related to income.

Question 13

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

Accepted Answer

A) increases; downward 
B) increases; upward 
C) decreases; upward 
D) decreases; downward 
A) increases; downward 
B) increases; upward 
C) decreases; upward 
D) decreases; downward

Question 14

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 15

The IS curve shifts when any of the following economic variables change except:

Accepted Answer

A) the interest rate. 
B) government spending. 
C) taxes. 
D) the marginal propensity to consume. 
A) the interest rate. 
B) government spending. 
C) taxes. 
D) the marginal propensity to consume.

Question 16

Along any given IS curve:

Accepted Answer

A) tax rates are fixed, but government spending varies. 
B) government spending is fixed, but taxes vary. 
C) both government spending and taxes vary. 
D) both government spending and taxes are fixed. 
A) tax rates are fixed, but government spending varies. 
B) government spending is fixed, but taxes vary. 
C) both government spending and taxes vary. 
D) both government spending and taxes are fixed.

Question 17

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a.What is the numerical formula for the IS curve?

Accepted Answer

a.Y = 2,800 - 400r or r = 7 - 0.0025Y.
b

Question 18

An increase in government spending generally shifts the IS curve:

Accepted Answer

A) downward and to the left. 
B) upward and to the right. 
C) upward and to the left. 
D) downward and to the right. 
A) downward and to the left. 
B) upward and to the right. 
C) upward and to the left. 
D) downward and to the right.

Question 19

Exhibit: Keynesian Cross   In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

Accepted Answer

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

Question 20

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

Accepted Answer

We know that ΔY / ΔG = 1 / (1 - MPC). Re

In the money market, an increase in the money supply:

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve:

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

Along an IS curve all of the following are always true except:

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r₁, then people will _ bonds, and the interest rate will _.

One argument in favour of tax cuts over spending-based fiscal stimulus is that:

An LM curve shows combinations of:

The simple investment function shows that investment _ as _ increases.

According to the theory of liquidity preference, the supply of real money balances:

The demand for money helps determine the equilibrium level of the interest rate, even though holding money does not earn any interest income. How is this possible?

The intersection of the IS and LM curves determines the values of:

The theory of liquidity preference states that the quantity of real money balances demanded is:

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _, and this shifts the expenditure function _, thereby decreasing income.

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

The IS curve shifts when any of the following economic variables change except:

Along any given IS curve:

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200. a.What is the numerical formula for the IS curve?

An increase in government spending generally shifts the IS curve:

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₁, then inventories will _, inducing firms to _ production.

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand Ii: Applying the Islm Model

The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

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

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

Filters

Exam 11: Aggregate Demand I: Building the Islm Model

In the money market, an increase in the money supply:

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve:

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

Along an IS curve all of the following are always true except:

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____.

One argument in favour of tax cuts over spending-based fiscal stimulus is that:

An LM curve shows combinations of:

The simple investment function shows that investment _____ as _____ increases.

According to the theory of liquidity preference, the supply of real money balances:

The demand for money helps determine the equilibrium level of the interest rate, even though holding money does not earn any interest income. How is this possible?

The intersection of the IS and LM curves determines the values of:

The theory of liquidity preference states that the quantity of real money balances demanded is:

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

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

The IS curve shifts when any of the following economic variables change except:

Along any given IS curve:

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200. a.What is the numerical formula for the IS curve?

An increase in government spending generally shifts the IS curve:

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

The Science of Macroeconomics

The Data of Microeconomics

National Income: Where It Comes From and Where It Goes

The Monetary System: What It Is and How It Works

Inflation: Its Causes, Effects, and Social Costs

The Open Economy

Unemployment and the Labour Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand Ii: Applying the Islm Model

The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

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

A Dynamic Model of Economic Fluctuations

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

The Microfoundations of Consumption and Investment

Filters

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r₁, then people will _ bonds, and the interest rate will _.

The simple investment function shows that investment _ as _ increases.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _, and this shifts the expenditure function _, thereby decreasing income.

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

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₁, then inventories will _, inducing firms to _ production.