Question 1

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Accepted Answer

A)  Y = 1,100, r = 6 percent. 
B)  Y = 1,200, r = 5 percent. 
C)  Y = 1,000, r = 5 percent. 
D)  Y = 1,100, r = 5 percent. 
A)  Y = 1,100, r = 6 percent. 
B)  Y = 1,200, r = 5 percent. 
C)  Y = 1,000, r = 5 percent. 
D)  Y = 1,100, r = 5 percent.

Question 2

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.

Accepted Answer

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

Question 3

Use the following to answer questions :
Exhibit: IS-LM Fiscal Policy  
-(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

Accepted Answer

A)  r2, Y2 
B)  r3, Y2 
C)  r2, Y3 
D)  r3, Y3 
A)  r2, Y2 
B)  r3, Y2 
C)  r2, Y3 
D)  r3, Y3

Question 4

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

Accepted Answer

A)  income, the interest rate, consumption, and investment are unchanged. 
B)  income and the interest rate rise, whereas consumption and investment fall. 
C)  income and the interest rate fall, whereas consumption and interest rise. 
D)  income, the interest rate, consumption, and investment all rise. 
A)  income, the interest rate, consumption, and investment are unchanged. 
B)  income and the interest rate rise, whereas consumption and investment fall. 
C)  income and the interest rate fall, whereas consumption and interest rise. 
D)  income, the interest rate, consumption, and investment all rise.

Question 5

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

Accepted Answer

A)  increase 
B)  decrease 
C)  first increase and then decrease 
D)  first decrease and then increase 
A)  increase 
B)  decrease 
C)  first increase and then decrease 
D)  first decrease and then increase

Question 6

Other things equal, a given change in money supply has a larger effect on demand the:

Accepted Answer

A)  flatter the IS curve. 
B)  steeper the IS curve. 
C)  smaller the interest sensitivity of expenditure demand. 
D)  larger the income sensitivity of money demand. 
A)  flatter the IS curve. 
B)  steeper the IS curve. 
C)  smaller the interest sensitivity of expenditure demand. 
D)  larger the income sensitivity of money demand.

Question 7

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

Accepted Answer

A)  real; real 
B)  nominal; nominal 
C)  real; nominal 
D)  nominal; real 
A)  real; real 
B)  nominal; nominal 
C)  real; nominal 
D)  nominal; real

Question 8

Suppose Congress wishes to reduce the budget deficit by reducing government spending. Use the IS-LM model to illustrate graphically the impact of the reduction in government spending on output and interest rates. 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 Suppose Congress wishes to reduce the budget...

Question 9

A liquidity trap occurs when:

Accepted Answer

A)  banks have too much currency and close their doors to new customers. 
B)  the central bank mistakenly prints too much money, generating hyperinflation. 
C)  interest rates fall so low that monetary policy is no longer effective. 
D)  dams and locks are built to prevent flooding. 
A)  banks have too much currency and close their doors to new customers. 
B)  the central bank mistakenly prints too much money, generating hyperinflation. 
C)  interest rates fall so low that monetary policy is no longer effective. 
D)  dams and locks are built to prevent flooding.

Question 10

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

Accepted Answer

A)  buy; IS 
B)  buy; LM 
C)  sell; IS 
D)  sell; LM 
A)  buy; IS 
B)  buy; LM 
C)  sell; IS 
D)  sell; LM

Question 11

Use the following to answer questions :
Exhibit: IS-LM to Aggregate Demand  
-(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:

Accepted Answer

A)  the aggregate demand curve will shift to the right. 
B)  the aggregate demand curve will shift to the left. 
C)  this represents a movement up the aggregate demand curve. 
D)  this represents a movement down the aggregate demand curve. 
A)  the aggregate demand curve will shift to the right. 
B)  the aggregate demand curve will shift to the left. 
C)  this represents a movement up the aggregate demand curve. 
D)  this represents a movement down the aggregate demand curve.

Question 12

The Pigou effect:

Accepted Answer

A)  suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. 
B)  suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more. 
C)  suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more. 
D)  is generally accepted as adequate proof that the economy must be able to correct itself. 
A)  suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. 
B)  suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more. 
C)  suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more. 
D)  is generally accepted as adequate proof that the economy must be able to correct itself.

Question 13

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

Accepted Answer

A)  lower; lower 
B)  lower; higher 
C)  no change in; lower 
D)  no change in; higher 
A)  lower; lower 
B)  lower; higher 
C)  no change in; lower 
D)  no change in; higher

Question 14

Other things equal, a given change in government spending has a larger effect on demand the:

Accepted Answer

A)  flatter the LM curve. 
B)  steeper the LM curve. 
C)  smaller the interest sensitivity of money demand. 
D)  larger the income sensitivity of money demand. 
A)  flatter the LM curve. 
B)  steeper the LM curve. 
C)  smaller the interest sensitivity of money demand. 
D)  larger the income sensitivity of money demand.

Question 15

Policymakers are contemplating undertaking either an increase in government spending or an increase in the money supply. Either policy is forecast to have the same impact on income in the short run. Use the IS-LM model to compare the impact on consumption and investment of the two policy alternatives.

Accepted Answer

The increase in government spending will

Question 16

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

Accepted Answer

A)  increase 
B)  decrease 
C)  first increase and then decrease 
D)  first decrease and then increase 
A)  increase 
B)  decrease 
C)  first increase and then decrease 
D)  first decrease and then increase

Question 17

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

Accepted Answer

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

Question 18

Use the following to answer questions :
Exhibit: IS-LM Fiscal Policy  
-(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

Accepted Answer

A)  r2, Y2 
B)  r3, Y2 
C)  r2, Y3 
D)  r3, Y3 
A)  r2, Y2 
B)  r3, Y2 
C)  r2, Y3 
D)  r3, Y3

Question 19

A given increase in taxes shifts the IS curve more to the left the:

Accepted Answer

A)  larger the marginal propensity to consume. 
B)  smaller the marginal propensity to consume. 
C)  larger the government spending. 
D)  smaller the government spending. 
A)  larger the marginal propensity to consume. 
B)  smaller the marginal propensity to consume. 
C)  larger the government spending. 
D)  smaller the government spending.

Question 20

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Accepted Answer

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

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the curve to the .

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, a tax cut would generate the new equilibrium combination of interest rate and income:

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

Other things equal, a given change in money supply has a larger effect on demand the:

Investment depends on the interest rate, and money demand depends on the interest rate.

A liquidity trap occurs when:

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant:

The Pigou effect:

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to income and a interest rate.

Other things equal, a given change in government spending has a larger effect on demand the:

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

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

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, an increase in government spending would generate the new equilibrium combination of interest rate and income:

A given increase in taxes shifts the IS curve more to the left the:

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .

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

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

Other things equal, a given change in money supply has a larger effect on demand the:

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

A liquidity trap occurs when:

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:

The Pigou effect:

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

Other things equal, a given change in government spending has a larger effect on demand the:

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

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

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

A given increase in taxes shifts the IS curve more to the left the:

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

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

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the curve to the .

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, a tax cut would generate the new equilibrium combination of interest rate and income:

Investment depends on the interest rate, and money demand depends on the interest rate.

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant:

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to income and a interest rate.

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, an increase in government spending would generate the new equilibrium combination of interest rate and income:

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .