Question 1

If actual GDP is greater than potential GDP:

Accepted Answer

A) businesses can easily increase supply. 
B) the economy can experience inflation. 
C) businesses are not producing at maximum capacity. 
D) unemployment must be higher than the natural rate of unemployment. 
A) businesses can easily increase supply. 
B) the economy can experience inflation. 
C) businesses are not producing at maximum capacity. 
D) unemployment must be higher than the natural rate of unemployment. B

Question 2

You spend $400 on new books for your courses this semester. In which component of aggregate expenditure is this expenditure included?

Accepted Answer

A) government expenditure 
B) exports 
C) consumption 
D) planned investment 
A) government expenditure 
B) exports 
C) consumption 
D) planned investment C

Question 3

Suppose that the Federal Reserve has recently cut interest rates in the economy and there is a credible forecast that the Fed will again cut interest rates in the future. A manager who is IS-MP savvy will expect that:

Accepted Answer

A) the cost of borrowing will increase in the near future. 
B) interest rates will rise in the near future. 
C) GDP in the economy will fall and sales will decrease in the future. 
D) GDP in the economy will rise and sales will increase in the future. 
A) the cost of borrowing will increase in the near future. 
B) interest rates will rise in the near future. 
C) GDP in the economy will fall and sales will decrease in the future. 
D) GDP in the economy will rise and sales will increase in the future. D

Question 4

At macroeconomic equilibrium in an open economy:

Accepted Answer

A) Y = C + I + G + (X - M). B) Y > AE. C) Y = C - I - G - NX. D) Y < AE. A) Y = C + I + G + (X - M). B) Y > AE. C) Y = C - I - G - NX. D) Y < AE.

Question 5

Which of the following shows the correct effect on the IS-MP framework if there is a rise in liquidity risk in the economy?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 6

For each of the following cases, determine the appropriate monetary policy response.
(a) There is a positive output gap.
(b) There is a negative output gap.

Accepted Answer

The answer of For each of the following cases, determine...

Question 7

From September 2017 to April 2018, South Africa's consumer confidence index rose from 98.8 to 103.2. How would such a change have impacted the IS curve in South Africa?

Accepted Answer

A) Decreased consumer confidence about the future lowers current consumption, which would cause the IS curve to shift left. 
B) The increase in the consumer confidence index means consumers expect income to rise, and this increase in consumer spending would lead to a right shift in the IS curve. 
C) The IS curve is not affected by changes in consumer confidence. 
D) The decreased consumer confidence today would imply a higher consumer confidence for the future, and this would increase consumption and shift the IS curve to the left. 
A) Decreased consumer confidence about the future lowers current consumption, which would cause the IS curve to shift left. 
B) The increase in the consumer confidence index means consumers expect income to rise, and this increase in consumer spending would lead to a right shift in the IS curve. 
C) The IS curve is not affected by changes in consumer confidence. 
D) The decreased consumer confidence today would imply a higher consumer confidence for the future, and this would increase consumption and shift the IS curve to the left.

Question 8

Which of the following shows the correct effect on the IS curve of an increase in the real interest rate?

Accepted Answer

A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point D to point C 
A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point D to point C

Question 9

If the real rate of interest is 2.7% and the risk-free rate is 1.5%, the risk premium is:

Accepted Answer

A) 1.2%. 
B) 4.2%. 
C) 3.7%. 
D) 2%. 
A) 1.2%. 
B) 4.2%. 
C) 3.7%. 
D) 2%.

Question 10

Which of the following causes shifts in the IS curve?

Accepted Answer

A) The real interest rate decreases. 
B) Financial shocks occur. 
C) The real interest rate increases. 
D) Spending shocks occur. 
A) The real interest rate decreases. 
B) Financial shocks occur. 
C) The real interest rate increases. 
D) Spending shocks occur.

Question 11

If actual GDP is less than potential GDP:

Accepted Answer

A) businesses are producing at maximum capacity. 
B) the economy is unable to increase production any further. 
C) aggregate expenditure must be less than output. 
D) unemployment will rise in the economy. 
A) businesses are producing at maximum capacity. 
B) the economy is unable to increase production any further. 
C) aggregate expenditure must be less than output. 
D) unemployment will rise in the economy.

Question 12

In October 2019, the Federal Reserve lowered real interest rates in the economy. Which of the following shows the correct effect on the IS curve?

Accepted Answer

A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point C to point D 
A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point C to point D

Question 13

Explain how each of the following events affects the IS curve for the Mexican economy.
(a) The United States institutes tariffs on washing machines from Mexico.
(b) The consumer confidence index in Mexico rises.
(c) Income tax rates in Mexico increase.

Accepted Answer

The answer of Explain how each of the following events...

Question 14

In the IS-MP framework, starting from macroeconomic equilibrium at a 0% output gap:
(a) a rise in the real interest rate will lead to _____ (a recession, inflation).
(b) a rise in the real interest rate will lead to _____ (a negative output gap, a positive output gap).
(c) a rise in the real interest rate will lead to _____ (lower sales forecasts, higher sales forecasts).

Accepted Answer

The answer of In the IS-MP framework, starting from macroeconomic...

Question 15

For each of the following scenarios, identify the component of AE that is affected and the impact on AE, and holding everything else equal.
(a) You purchase a new Ford Fusion from the local dealership.
(b) Consumers decide to save more in preparation for an uncertain economic period ahead.
(c) Your company brings in steel from Canada as a raw material.

Accepted Answer

The answer of For each of the following scenarios, identify...

Question 16

In June 2019, India imposed a tariff on almonds from the United States. How does this affect the IS curve in the U.S.?

Accepted Answer

A) Net exports decrease, leading to a left shift of the IS curve. 
B) Net exports increase, leading to a right shift of the IS curve. 
C) Government expenditure decreases, leading to a left shift of the IS curve. 
D) Interest rates fall, leading to a left shift in the IS curve. 
A) Net exports decrease, leading to a left shift of the IS curve. 
B) Net exports increase, leading to a right shift of the IS curve. 
C) Government expenditure decreases, leading to a left shift of the IS curve. 
D) Interest rates fall, leading to a left shift in the IS curve.

Question 17

How do interest rates affect consumption in the economy?

Accepted Answer

A) Lower interest rates encourage consumers to save more money, and thus consumption rises. 
B) Lower real interest rates imply a lower opportunity cost of consumption, and thus consumption rises. 
C) Higher interest rates encourage consumers to increase financed purchases, and this encourages consumption. 
D) Higher interest rates make it more expensive for firms to take loans, and so consumption falls. 
A) Lower interest rates encourage consumers to save more money, and thus consumption rises. 
B) Lower real interest rates imply a lower opportunity cost of consumption, and thus consumption rises. 
C) Higher interest rates encourage consumers to increase financed purchases, and this encourages consumption. 
D) Higher interest rates make it more expensive for firms to take loans, and so consumption falls.

Question 18

What is the relationship between higher interest rates and aggregate expenditure?

Accepted Answer

A) Higher interest rates lower consumption and investment but raise government expenditures and net exports, and thus they have an indeterminate effect on aggregate expenditure. 
B) Higher interest rates boost aggregate expenditure. 
C) Aggregate expenditures are determined independently from changes in real interest rates. 
D) Higher interest rates cause aggregate expenditure to fall. 
A) Higher interest rates lower consumption and investment but raise government expenditures and net exports, and thus they have an indeterminate effect on aggregate expenditure. 
B) Higher interest rates boost aggregate expenditure. 
C) Aggregate expenditures are determined independently from changes in real interest rates. 
D) Higher interest rates cause aggregate expenditure to fall.

Question 19

The risk premium is the:

Accepted Answer

A) extra rise in interest rates when the Federal Reserve identifies an output gap. 
B) extra interest charged by lenders to account for risk. 
C) risk-free rate of interest. 
D) federal funds rate. 
A) extra rise in interest rates when the Federal Reserve identifies an output gap. 
B) extra interest charged by lenders to account for risk. 
C) risk-free rate of interest. 
D) federal funds rate.

Question 20

When the perceived financial risk rises in an economy, the:

Accepted Answer

A) lenders become less risk averse. 
B) TED spread rises. 
C) TED spread falls. 
D) risk premiums fall. 
A) lenders become less risk averse. 
B) TED spread rises. 
C) TED spread falls. 
D) risk premiums fall.

Exam 30: IS-MP Analysis: Interest Rates and Output

If actual GDP is greater than potential GDP:

You spend $400 on new books for your courses this semester. In which component of aggregate expenditure is this expenditure included?

Suppose that the Federal Reserve has recently cut interest rates in the economy and there is a credible forecast that the Fed will again cut interest rates in the future. A manager who is IS-MP savvy will expect that:

At macroeconomic equilibrium in an open economy:

Which of the following shows the correct effect on the IS-MP framework if there is a rise in liquidity risk in the economy?

For each of the following cases, determine the appropriate monetary policy response. (a) There is a positive output gap. (b) There is a negative output gap.

From September 2017 to April 2018, South Africa's consumer confidence index rose from 98.8 to 103.2. How would such a change have impacted the IS curve in South Africa?

Which of the following shows the correct effect on the IS curve of an increase in the real interest rate?

If the real rate of interest is 2.7% and the risk-free rate is 1.5%, the risk premium is:

Which of the following causes shifts in the IS curve?

If actual GDP is less than potential GDP:

In October 2019, the Federal Reserve lowered real interest rates in the economy. Which of the following shows the correct effect on the IS curve?

Explain how each of the following events affects the IS curve for the Mexican economy. (a) The United States institutes tariffs on washing machines from Mexico. (b) The consumer confidence index in Mexico rises. (c) Income tax rates in Mexico increase.

In June 2019, India imposed a tariff on almonds from the United States. How does this affect the IS curve in the U.S.?

How do interest rates affect consumption in the economy?

What is the relationship between higher interest rates and aggregate expenditure?

The risk premium is the:

When the perceived financial risk rises in an economy, the:

The Core Principles of Economics

Demand: Thinking Like a Buyer

Supply: Thinking Like a Seller

Equilibrium: Where Supply Meets Demand

Elasticity: Measuring Responsiveness

When Governments Intervene in Markets

Welfare and Efficiency

Gains From Trade

International Trade

Externalities and Public Goods

Labor Demand and Supply

Wages, Workers, and Management

Inequality, Social Insurance, and Redistribution

Market Structure and Market Power

Entry, Exit, and Long-Run Profitability

Business Strategy

Sophisticated Pricing Strategies

Game Theory and Strategic Choices

Decisions Involving Uncertainty

Decisions With Private Information

Sizing up the Economy Using Gdp

Economic Growth

Unemployment

Inflation and Money

Consumption and Saving

Investment

The Financial Sector

International Finance and the Exchange Rate

Business Cycles

Phillips Curve

The Fed Model: Linking Interest Rates, Output, and Inflation

Aggregate Demand and Aggregate Supply

Monetary Policy

Government Spending, Taxes, and Fiscal Policy

Appendix: Aggregate Expenditure and the Multiplier

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