Exam 28: The ISLM Model

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

The key assumption in the ISLM model is that ________.

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?

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

The LM curve will be vertical and fiscal policy ineffective when ________.

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

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

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

In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.

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

Macroeconomic equilibrium requires ________.

In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary monetary policy is to ________.

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

Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.

Using the long-run ISLM model, explain and demonstrate graphically the neutrality of money, for the case of an increase in the money supply.

Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

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

Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall.

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