Question 1

Those economists who believe that monetary policy is more potent than fiscal policy argue that the:

Accepted Answer

A)  responsiveness of money demand to the interest rate is large. 
B)  responsiveness of money demand to the interest rate is small. 
C)  IS curve is nearly vertical. 
D)  LM curve is nearly horizontal. 
A)  responsiveness of money demand to the interest rate is large. 
B)  responsiveness of money demand to the interest rate is small. 
C)  IS curve is nearly vertical. 
D)  LM curve is nearly horizontal. B

Question 2

What are shocks? How do shocks respond to the IS and LM curves?

Accepted Answer

Shocks are disturbances other than monetary and fiscal policies that cause shifts to the IS and LM curves. Shocks to the IS curve are exogenous changes in the demand for goods and services. The fall in investment reduces planned expenditure and shifts the IS curve to the left, reducing income and employment. A rise in the consumption function increases planned expenditure and shifts the IS curve to the right, which raises income. 
Shocks to the LM curve are exogenous changes in money supply. An increase in the money demand shifts the LM curve upward, which tends to raise the interest rate and depress income.

Question 3

The Great Depression in the United States:

Accepted Answer

A)  probably was caused by a rightward shift in the LM curve because the price level fell more rapidly than the fall in the money supply from 1929 to 1933. 
B)  cannot be attributed to a fall in the money supply because the money supply did not fall. 
C)  probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931. 
D)  probably was caused by a leftward shift in the LM curve because interest rates remained high between 1929 and 1933. 
A)  probably was caused by a rightward shift in the LM curve because the price level fell more rapidly than the fall in the money supply from 1929 to 1933. 
B)  cannot be attributed to a fall in the money supply because the money supply did not fall. 
C)  probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931. 
D)  probably was caused by a leftward shift in the LM curve because interest rates remained high between 1929 and 1933. C

Question 4

Possible explanations put forth for the Great Depression do not include:

Accepted Answer

A)  a shift in the IS curve. 
B)  a shift in the LM curve. 
C)  the debt-deflation theory. 
D)  the Pigou effect. 
A)  a shift in the IS curve. 
B)  a shift in the LM curve. 
C)  the debt-deflation theory. 
D)  the Pigou effect.

Question 5

What is debt-deflation theory? How should a country treat the condition if depression repeats itself?

Accepted Answer

The debt-deflation theory explains the e

Question 6

In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):

Accepted Answer

A)  increase in both output and the nominal interest rate. 
B)  decrease in both output and the nominal interest rate. 
C)  increase in output and a decrease in the nominal interest rate. 
D)  decrease in output and an increase in the nominal interest rate. 
A)  increase in both output and the nominal interest rate. 
B)  decrease in both output and the nominal interest rate. 
C)  increase in output and a decrease in the nominal interest rate. 
D)  decrease in output and an increase in the nominal interest rate.

Question 7

Use the following to answer questions :
Exhibit: Short Run to Long Run  
-(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.

Accepted Answer

A)  B; higher 
B)  B; lower 
C)  C; higher 
D)  C; lower 
A)  B; higher 
B)  B; lower 
C)  C; higher 
D)  C; lower

Question 8

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

Accepted Answer

A)  both consumption and investment remain unchanged. 
B)  consumption rises but investment falls. 
C)  investment rises but consumption falls. 
D)  both consumption and investment fall. 
A)  both consumption and investment remain unchanged. 
B)  consumption rises but investment falls. 
C)  investment rises but consumption falls. 
D)  both consumption and investment fall.

Question 9

How do changes in price level affect the equilibrium in the IS-LM model in the short as well as long run?

Accepted Answer

In the short run the price level is assu

Question 10

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

Accepted Answer

A)  investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. 
B)  investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. 
C)  investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. 
D)  the price level is fixed whereas in the IS-LM model it is allowed to vary. 
A)  investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. 
B)  investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. 
C)  investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. 
D)  the price level is fixed whereas in the IS-LM model it is allowed to vary.

Question 11

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

Accepted Answer

A)  IS; shifts to the right 
B)  IS; does not shift 
C)  LM: shifts to the right 
D)  LM; does not shift 
A)  IS; shifts to the right 
B)  IS; does not shift 
C)  LM: shifts to the right 
D)  LM; does not shift

Question 12

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

Accepted Answer

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

Question 13

The money hypothesis suggests that the Great Depression was caused by a:

Accepted Answer

A)  leftward shift in the IS curve. 
B)  rightward shift in the IS curve. 
C)  leftward shift in the LM curve. 
D)  rightward shift in the LM curve. 
A)  leftward shift in the IS curve. 
B)  rightward shift in the IS curve. 
C)  leftward shift in the LM curve. 
D)  rightward shift in the LM curve.

Question 14

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

Accepted Answer

A)  lower; raises; reduces 
B)  higher; lowers; increases 
C)  lower; lowers; increases 
D)  higher; raises; reduces 
A)  lower; raises; reduces 
B)  higher; lowers; increases 
C)  lower; lowers; increases 
D)  higher; raises; reduces

Question 15

Two identical countries, Alpha and Beta, can be described by the IS-LM model in the short run. The governments of both countries cut taxes by the same amount. The Central Bank of Alpha follows a policy of holding a constant money supply. The Central Bank of Beta follows a policy of holding a constant interest rate. Compare the impact of the tax cut on income and interest rates in the two countries.

Accepted Answer

The interest rate will increase in Alpha

Question 16

How can the Fed keep the economy from falling into a recession if the budget deficit is reduced? Use the IS-LM model to illustrate graphically the impact of both the fiscal policy reducing the deficit and the monetary policy, which prevents output from falling. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.

Accepted Answer

The answer of How can the Fed keep the economy...

Question 17

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

Accepted Answer

A)  G/(1 - MP
C) . 
B)  more than zero but less than G/(1 - MP
C) . 
C)  G. 
D)  zero. 
A)  G/(1 - MP
C) . 
B)  more than zero but less than G/(1 - MP
C) . 
C)  G. 
D)  zero.

Question 18

Assume that initially everyone expects the price level to stay the same. Now the Federal Reserve announces that it will increase the rate of money growth in one year. People now expect inflation. Use the IS-LM model to illustrate graphically the impact of expected inflation on the level of output and on the real and nominal interest rates.

Accepted Answer

@#IMG-DLM& The increase in expected infl

Question 19

The slope of the IS curve depends on:

Accepted Answer

A)  the interest sensitivity of investment and the amount of government spending. 
B)  the interest sensitivity of investment and the marginal propensity to consume. 
C)  the interest sensitivity of investment and the tax rates. 
D)  tax rates and government spending. 
A)  the interest sensitivity of investment and the amount of government spending. 
B)  the interest sensitivity of investment and the marginal propensity to consume. 
C)  the interest sensitivity of investment and the tax rates. 
D)  tax rates and government spending.

Question 20

Use the following to answer questions :
Exhibit: Policy Interaction  
-(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____.

Accepted Answer

A)  increase; LM2 
B)  decrease; LM2 
C)  increase; LM3 
D)  decrease; LM3 
A)  increase; LM2 
B)  decrease; LM2 
C)  increase; LM3 
D)  decrease; LM3

Those economists who believe that monetary policy is more potent than fiscal policy argue that the:

What are shocks? How do shocks respond to the IS and LM curves?

The Great Depression in the United States:

Possible explanations put forth for the Great Depression do not include:

What is debt-deflation theory? How should a country treat the condition if depression repeats itself?

In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at with a _ price level.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

How do changes in price level affect the equilibrium in the IS-LM model in the short as well as long run?

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

A decrease in the price level shifts the curve to the right, and the aggregate demand curve .

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

The money hypothesis suggests that the Great Depression was caused by a:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and __ spending.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

The slope of the IS curve depends on:

The Science of Macroeconomics

The Data of Macroeconomics

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 Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Exam 12: Aggregate Demand Ii: Applying the Is-Lm Model

Those economists who believe that monetary policy is more potent than fiscal policy argue that the:

What are shocks? How do shocks respond to the IS and LM curves?

The Great Depression in the United States:

Possible explanations put forth for the Great Depression do not include:

What is debt-deflation theory? How should a country treat the condition if depression repeats itself?

In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

How do changes in price level affect the equilibrium in the IS-LM model in the short as well as long run?

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

The money hypothesis suggests that the Great Depression was caused by a:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

The slope of the IS curve depends on:

The Science of Macroeconomics

The Data of Macroeconomics

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 Labor Market

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth II: Technology, Empirics, and Policy

Introduction to Economic Fluctuations

Aggregate Demand I: Building the Is-Lm Model

The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

A Dynamic Model of Economic Fluctuations

Understanding Consumer Behavior

The Theory of Investment

Alternative Perspectives on Stabilization Policy

Government Debt and Budget Deficits

The Financial System: Opportunities and Dangers

Filters

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at with a _ price level.

A decrease in the price level shifts the curve to the right, and the aggregate demand curve .

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and __ spending.