Exam 28: The ISLM Model

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

As interest rates rise, the opportunity cost of holding money ________ and the quantity of money demanded ________.

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.

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

The money market is in equilibrium ________.

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

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

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 money demand decreases, 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 demand of money which will cause the interest rate to ________.

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

When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________.

The money market is in equilibrium ________.

Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes.

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

In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level.

A contractionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant.

Using the ISLM model, show graphically and explain the effects of a monetary contraction. What is the effect on the equilibrium interest rate and level of output?

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

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