Question 1

The theory of liquidity preference states 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.

Question 2

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and on the IS curve?

Accepted Answer

If the government policy decided to main

Question 3

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

Accepted Answer

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

Question 4

Two interpretations of the IS-LM model are that the model explains:

Accepted Answer

A) the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. 
B) the short-run quantity theory of income or the short-run Fisher effect. 
C) the determination of investment and saving or what shifts the liquidity preference schedule. 
D) changes in government spending and taxes or the determination of the supply of real money balances. 
A) the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. 
B) the short-run quantity theory of income or the short-run Fisher effect. 
C) the determination of investment and saving or what shifts the liquidity preference schedule. 
D) changes in government spending and taxes or the determination of the supply of real money balances.

Question 5

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

Accepted Answer

A) 350. 
B) 600. 
C) 950. 
D) 1,100. 
A) 350. 
B) 600. 
C) 950. 
D) 1,100.

Question 6

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Accepted Answer

The liquidity preference model predicts

Question 7

Assume that money demand is given by (M / P)d = 0.5Y - 100r, and (M / P)s equals 800.
a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

Accepted Answer

a. @#IMG-DLM& b.The

Question 8

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

Accepted Answer

A) not change. 
B) be smaller. 
C) be bigger. 
D) be equal to 1. 
A) not change. 
B) be smaller. 
C) be bigger. 
D) be equal to 1.

Question 9

An increase in taxes 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 10

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:

Accepted Answer

A) one unit. 
B) ΔG. 
C) ΔG divided by one minus the marginal propensity to consume. 
D) ΔG multiplied one plus the marginal propensity to consume. 
A) one unit. 
B) ΔG. 
C) ΔG divided by one minus the marginal propensity to consume. 
D) ΔG multiplied one plus the marginal propensity to consume.

Question 11

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

Accepted Answer

A) the budget deficit 
B) consumption 
C) income 
D) real balances 
A) the budget deficit 
B) consumption 
C) income 
D) real balances

Question 12

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2 / 3 (Y - T). Planned investment is 300, as are government spending and taxes.
a.If Y is 1,500, what is planned spending? What is inventory accumulation or decumulation? Should equilibrium Y be higher or lower than 1,500?
b.What is equilibrium Y?
c.What are equilibrium consumption, private saving, public saving, and national saving?
d.How much does equilibrium income decrease when G is reduced to 200? What is the multiplier for government spending?

Accepted Answer

a.Planned spending is 1,600. Inventory d

Question 13

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income.

Accepted Answer

A) aggregate demand; aggregate supply 
B) aggregate supply; aggregate demand 
C) monetary policy; fiscal policy 
D) fiscal policy; monetary policy 
A) aggregate demand; aggregate supply 
B) aggregate supply; aggregate demand 
C) monetary policy; fiscal policy 
D) fiscal policy; monetary policy

Question 14

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

Accepted Answer

A) increase by 100 
B) increase by more than 100 
C) decrease by 100 
D) increase but by less than 100 
A) increase by 100 
B) increase by more than 100 
C) decrease by 100 
D) increase but by less than 100

Question 15

The equilibrium of the Keynesian cross shows:

Accepted Answer

A) determination of equilibrium income and the interest rate in the short run. 
B) determination of equilibrium income and the interest rate in the long run. 
C) equality of planned expenditure and income in the short run. 
D) equality of planned expenditure and income in the long run. 
A) determination of equilibrium income and the interest rate in the short run. 
B) determination of equilibrium income and the interest rate in the long run. 
C) equality of planned expenditure and income in the short run. 
D) equality of planned expenditure and income in the long run.

Question 16

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 17

Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.7 in each country. Country A decides to increase spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater?

Accepted Answer

a. @#IMG-DLM& b.The equilibriu

Question 18

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.

Accepted Answer

A) $2 billion; $4 billion 
B) $0.75 billion; $1 billion 
C) $0.75 billion; $0.75 billion 
D) $1 billion; $4 billion 
A) $2 billion; $4 billion 
B) $0.75 billion; $1 billion 
C) $0.75 billion; $0.75 billion 
D) $1 billion; $4 billion

Question 19

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 20

Exhibit: Market for Real Money Balances   Based on the graph, the equilibrium levels of interest rates and real money balances are:

Accepted Answer

A) r1 and M1 / P1 
B) r2 and M2 / P2 
C) r3 and M2 / P2 
D) r3 and M3 / P3 
A) r1 and M1 / P1 
B) r2 and M2 / P2 
C) r3 and M2 / P2 
D) r3 and M3 / P3

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

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and on the IS curve?

According to the theory of liquidity preference, decreasing the money supply will _ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _ nominal interest rates in the long run.

Two interpretations of the IS-LM model are that the model explains:

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Assume that money demand is given by (M / P)^d = 0.5Y - 100r, and (M / P)^s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

An increase in taxes shifts the IS curve:

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

According to classical theory, national income depends on _, while Keynes proposed that _ determines the level of national income.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

The equilibrium of the Keynesian cross shows:

The LM curve generally determines:

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _ and increases the equilibrium level of income by _.

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.

Exhibit: Market for Real Money Balances Based on the graph, the equilibrium levels of interest rates and real money balances are:

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

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

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and on the IS curve?

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

Two interpretations of the IS-LM model are that the model explains:

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Assume that money demand is given by (M / P)d = 0.5Y - 100r, and (M / P)s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

An increase in taxes shifts the IS curve:

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

The equilibrium of the Keynesian cross shows:

The LM curve generally determines:

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.

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.

Exhibit: Market for Real Money Balances Based on the graph, the equilibrium levels of interest rates and real money balances are:

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

According to the theory of liquidity preference, decreasing the money supply will _ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _ nominal interest rates in the long run.

Assume that money demand is given by (M / P)^d = 0.5Y - 100r, and (M / P)^s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

According to classical theory, national income depends on _, while Keynes proposed that _ determines the level of national income.

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _ and increases the equilibrium level of income by _.

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.