Question 1

An increase in spending that results from expansionary ________ policy causes the interest rate to ________,everything else held constant.

Accepted Answer

A)  fiscal; rise 
B)  fiscal; fall 
C)  incomes; rise 
D)  incomes; fall 
A)  fiscal; rise 
B)  fiscal; fall 
C)  incomes; rise 
D)  incomes; fall A

Question 2

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.

Accepted Answer

A)  increase; increase 
B)  not change; not change 
C)  increase; not change 
D)  not change; increase 
A)  increase; increase 
B)  not change; not change 
C)  increase; not change 
D)  not change; increase D

Question 3

When is the targeting of the money supply preferred to the interest-rate target? support your answer with the appropriate diagram.

Accepted Answer

The students must draw the diagram (Figure 8)of the textbook where they show diagramatically that a money supply target is preferred in terms of output fluctuation,when the IS curve is more unstable than the LM curve is.

Question 4

According to the liquidity preference theory,the demand for money is ________ related to aggregate output and ________ related to interest rates.

Accepted Answer

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

Question 5

As aggregate output rises,the demand for money ________ and the interest rate ________,so that money demanded equals money supplied and the money market is in equilibrium.

Accepted Answer

A)  increases; rises 
B)  increases; falls 
C)  decreases; rises 
D)  decreases; falls 
A)  increases; rises 
B)  increases; falls 
C)  decreases; rises 
D)  decreases; falls

Question 6

Crowding out will be more pronounced the closer to vertical is the ________.

Accepted Answer

A)  IS curve 
B)  LM curve 
C)  consumption function 
D)  aggregate demand function 
A)  IS curve 
B)  LM curve 
C)  consumption function 
D)  aggregate demand function

Question 7

If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

Accepted Answer

A)  an interest rate; smaller 
B)  a money supply; smaller 
C)  a money supply; larger 
D)  an exchange rate; larger 
A)  an interest rate; smaller 
B)  a money supply; smaller 
C)  a money supply; larger 
D)  an exchange rate; larger

Question 8

If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will ________ and the interest rate will ________.

Accepted Answer

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

Question 9

In the long-run ISLM model and with everything else held constant,an increase in the money supply leaves the level of output and interest rates unchanged,an outcome called ________.

Accepted Answer

A)  interest rate overshooting 
B)  long-run money neutrality 
C)  long-run crowding out 
D)  the long-run Phillips curve 
A)  interest rate overshooting 
B)  long-run money neutrality 
C)  long-run crowding out 
D)  the long-run Phillips curve

Question 10

If the money supply increases,everything else held constant,the ________ curve shifts to the ________.

Accepted Answer

A)  IS; right 
B)  IS; left 
C)  LM; left 
D)  LM; right 
A)  IS; right 
B)  IS; left 
C)  LM; left 
D)  LM; right

Question 11

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess supply of money which will cause the interest rate to ________.

Accepted Answer

A)  right; fall 
B)  right; rise 
C)  left; fall 
D)  left; rise 
A)  right; fall 
B)  right; rise 
C)  left; fall 
D)  left; rise

Question 12

If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

Accepted Answer

A)  an interest rate; smaller 
B)  a money supply; smaller 
C)  a money supply; larger 
D)  an exchange rate; larger 
A)  an interest rate; smaller 
B)  a money supply; smaller 
C)  a money supply; larger 
D)  an exchange rate; larger

Question 13

As interest rates rise,the opportunity cost of holding money ________ and the demand for money ________.

Accepted Answer

A)  rises; rises 
B)  rises; falls 
C)  falls; rises 
D)  falls; falls 
A)  rises; rises 
B)  rises; falls 
C)  falls; rises 
D)  falls; falls

Question 14

The more interest-sensitive is money demand,the ________.

Accepted Answer

A)  more effective is fiscal policy relative to monetary policy 
B)  more effective is monetary policy relative to fiscal policy 
C)  steeper is the IS curve 
D)  steeper is the LM curve 
A)  more effective is fiscal policy relative to monetary policy 
B)  more effective is monetary policy relative to fiscal policy 
C)  steeper is the IS curve 
D)  steeper is the LM curve

Question 15

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.

Accepted Answer

A)  supply; fall 
B)  supply; rise 
C)  demand; fall 
D)  demand; rise 
A)  supply; fall 
B)  supply; rise 
C)  demand; fall 
D)  demand; rise

Question 16

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.

Accepted Answer

A)  right; supply 
B)  right; demand 
C)  left; supply 
D)  left; demand 
A)  right; supply 
B)  right; demand 
C)  left; supply 
D)  left; demand

Question 17

When is an interest-rate target preferred to the targeting of the money supply? support your answer with the appropriate diagram.

Accepted Answer

The students must draw the diagram from

Question 18

Crowding out will be more pronounced the closer to vertical is the ________.

Accepted Answer

A)  IS curve 
B)  LM curve 
C)  consumption function 
D)  aggregate demand function 
A)  IS curve 
B)  LM curve 
C)  consumption function 
D)  aggregate demand function

Question 19

Using the ISLM model,explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate.What is this effect called?

Accepted Answer

See figure below.
 @#IMG-DLM& This is the total cr

Question 20

In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________,everything else held constant.

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

Exam 28: The ISLM Model

An increase in spending that results from expansionary ________ policy causes the interest rate to ________,everything else held constant.

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.

When is the targeting of the money supply preferred to the interest-rate target? support your answer with the appropriate diagram.

According to the liquidity preference theory,the demand for money is ________ related to aggregate output and ________ related to interest rates.

As aggregate output rises,the demand for money ________ and the interest rate ________,so that money demanded equals money supplied and the money market is in equilibrium.

Crowding out will be more pronounced the closer to vertical is the ________.

If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will ________ and the interest rate will ________.

In the long-run ISLM model and with everything else held constant,an increase in the money supply leaves the level of output and interest rates unchanged,an outcome called ________.

If the money supply increases,everything else held constant,the ________ curve shifts to the ________.

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess supply of money which will cause the interest rate to ________.

If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

As interest rates rise,the opportunity cost of holding money ________ and the demand for money ________.

The more interest-sensitive is money demand,the ________.

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.

When is an interest-rate target preferred to the targeting of the money supply? support your answer with the appropriate diagram.

Crowding out will be more pronounced the closer to vertical is the ________.

Using the ISLM model,explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate.What is this effect called?

In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________,everything else held constant.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

An increase in spending that results from expansionary policy causes the interest rate to ,everything else held constant.

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to real output and the interest rate.

According to the liquidity preference theory,the demand for money is related to aggregate output and related to interest rates.

As aggregate output rises,the demand for money and the interest rate ,so that money demanded equals money supplied and the money market is in equilibrium.

If the economy is characterized by a certain and stable LM curve,then target produces fluctuations in aggregate output.

If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will and the interest rate will .

If the money supply increases,everything else held constant,the curve shifts to the .

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess supply of money which will cause the interest rate to .

If the economy is characterized by a certain and stable LM curve,then target produces fluctuations in aggregate output.

As interest rates rise,the opportunity cost of holding money and the demand for money .

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess of money which will cause the interest rate to .

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess of money which will cause the interest rate to fall.

In the ISLM framework a contractionary fiscal policy causes aggregate output to and the interest rate to ,everything else held constant.