Question 1

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

Accepted Answer

A)  increase by 100 
B)  increase by more than 100 
C)  decrease by 100 
D)  increase, but by less than 100 
A)  increase by 100 
B)  increase by more than 100 
C)  decrease by 100 
D)  increase, but by less than 100

Question 2

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

Accepted Answer

A)  national income; goods and services 
B)  the price level; goods and services 
C)  national income; money 
D)  the price level; money 
A)  national income; goods and services 
B)  the price level; goods and services 
C)  national income; money 
D)  the price level; money

Question 3

Changes in monetary policy shift the:

Accepted Answer

A)  LM curve. 
B)  planned spending curve. 
C)  money demand curve. 
D)  IS curve. 
A)  LM curve. 
B)  planned spending curve. 
C)  money demand curve. 
D)  IS curve.

Question 4

After the Kennedy tax cut in 1964, real GDP:

Accepted Answer

A)  fell and unemployment rose. 
B)  rose and unemployment fell. 
C)  and unemployment both rose. 
D)  and unemployment both fell. 
A)  fell and unemployment rose. 
B)  rose and unemployment fell. 
C)  and unemployment both rose. 
D)  and unemployment both fell.

Question 5

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

Accepted Answer

A)  government spending increases the MPC more than tax cuts. 
B)  the government-spending multiplier is larger than the tax multiplier. 
C)  government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. 
D)  increases in government spending increase planned spending, but tax cuts reduce planned spending. 
A)  government spending increases the MPC more than tax cuts. 
B)  the government-spending multiplier is larger than the tax multiplier. 
C)  government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. 
D)  increases in government spending increase planned spending, but tax cuts reduce planned spending.

Question 6

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

Accepted Answer

A)  is vertical. 
B)  is horizontal. 
C)  slopes upward and to the right. 
D)  slopes downward and to the right. 
A)  is vertical. 
B)  is horizontal. 
C)  slopes upward and to the right. 
D)  slopes downward and to the right.

Question 7

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and IS curve?

Accepted Answer

If the government policy decided to main

Question 8

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

Accepted Answer

A)  aggregate demand; aggregate supply 
B)  aggregate supply; aggregate demand 
C)  monetary policy; fiscal policy 
D)  fiscal policy; monetary policy 
A)  aggregate demand; aggregate supply 
B)  aggregate supply; aggregate demand 
C)  monetary policy; fiscal policy 
D)  fiscal policy; monetary policy

Question 9

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

Accepted Answer

A)  $1 billion; more than $1 billion 
B)  $0.75 billion; more than $0.75 billion 
C)  $0.75 billion; $0.75 billion 
D)  $1 billion; $1 billion 
A)  $1 billion; more than $1 billion 
B)  $0.75 billion; more than $0.75 billion 
C)  $0.75 billion; $0.75 billion 
D)  $1 billion; $1 billion

Question 10

The LM curve generally determines:

Accepted Answer

A)  income. 
B)  the interest rate. 
C)  both income and the interest rate. 
D)  neither income nor the interest rate. 
A)  income. 
B)  the interest rate. 
C)  both income and the interest rate. 
D)  neither income nor the interest rate.

Question 11

In the Keynesian-cross model, actual expenditures equal:

Accepted Answer

A)  GDP. 
B)  the money supply. 
C)  the supply of real balances. 
D)  unplanned inventory investment. 
A)  GDP. 
B)  the money supply. 
C)  the supply of real balances. 
D)  unplanned inventory investment.

Question 12

Of the following comments related to equilibrium level in an IS-LM model, which best denotes the logical causality, and why?
A. The goods and services market as denoted by IS curve gives an equilibrium level of Y, which when posited in the LM curve gives the equilibrium level of r.
B. The goods and services market as denoted by the IS curve gives an interest rate as a function of Y which helps solve for equilibrium in the money market.
C. The equilibrium rate of interest as determined by the demand for real balances for a given level of money supply in the money market helps determine the equilibrium level of investment that finally helps reach an equilibrium level of income.

Accepted Answer

Option (c) is correct. IS-LM analysis as

Question 13

The theory of liquidity preference implies that the quantity of real money balances demanded is:

Accepted Answer

A)  negatively related to both the interest rate and income. 
B)  positively related to both the interest rate and income. 
C)  positively related to the interest rate and negatively related to income. 
D)  negatively related to the interest rate and positively related to income. 
A)  negatively related to both the interest rate and income. 
B)  positively related to both the interest rate and income. 
C)  positively related to the interest rate and negatively related to income. 
D)  negatively related to the interest rate and positively related to income.

Question 14

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Accepted Answer

A)  2,000. 
B)  1,800. 
C)  1,600. 
D)  1,400. 
A)  2,000. 
B)  1,800. 
C)  1,600. 
D)  1,400.

Question 15

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

Accepted Answer

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

Question 16

a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: 
i. the axes
ii. the curves
iii. the initial equilibrium values
iv. the direction the curve shifis
v. the terminal equilibrium values.

b. Explain in words what happens to the equilibrium interest rate as a result of the open-market purchase.

Accepted Answer

a. @#IMG-DLM& 
b. Th

Question 17

The intersection of the IS and LM curve determines the values of:

Accepted Answer

A)  r, Y, and P, given G, T, and M. 
B)  r, Y, and M, given G, T, and P. 
C)  r and Y, given G, T, M, and P. 
D)  p and Y, given G, T, and M. 
A)  r, Y, and P, given G, T, and M. 
B)  r, Y, and M, given G, T, and P. 
C)  r and Y, given G, T, M, and P. 
D)  p and Y, given G, T, and M.

Question 18

An explanation for the slope of the LM curve is that as:

Accepted Answer

A)  the interest rate increases, income becomes higher. 
B)  the interest rate increases, income becomes lower. 
C)  income rises, money demand rises, and a higher interest rate is required. 
D)  income rises, money demand rises, and a lower interest rate is required. 
A)  the interest rate increases, income becomes higher. 
B)  the interest rate increases, income becomes lower. 
C)  income rises, money demand rises, and a higher interest rate is required. 
D)  income rises, money demand rises, and a lower interest rate is required.

Question 19

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

Accepted Answer

A)  inflation and unemployment 
B)  the price level and real output 
C)  the interest rate and the level of income 
D)  the interest rate and real money balances 
A)  inflation and unemployment 
B)  the price level and real output 
C)  the interest rate and the level of income 
D)  the interest rate and real money balances

Question 20

According to the theory of liquidity preference, the supply of real money balances:

Accepted Answer

A)  decreases as the interest rate increases. 
B)  increases as the interest rate increases. 
C)  increases as income increases. 
D)  is fixed. 
A)  decreases as the interest rate increases. 
B)  increases as the interest rate increases. 
C)  increases as income increases. 
D)  is fixed.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

The IS curve plots the relationship between the interest rate and that arises in the market for .

Changes in monetary policy shift the:

After the Kennedy tax cut in 1964, real GDP:

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and IS curve?

According to classical theory, national income depends on , while Keynes proposed that determined the level of national income.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by .

The LM curve generally determines:

In the Keynesian-cross model, actual expenditures equal:

The theory of liquidity preference implies that the quantity of real money balances demanded is:

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.

The intersection of the IS and LM curve determines the values of:

An explanation for the slope of the LM curve is that as:

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

According to the theory of liquidity preference, the supply of real money balances:

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 Ii: Applying 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 11: Aggregate Demand I: Building the Is-Lm Model

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

Changes in monetary policy shift the:

After the Kennedy tax cut in 1964, real GDP:

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

Assume that a government decides to maintain a constant interest rate in the money market and adjusts the money supply accordingly. What would be the impact of such a policy on the LM curve and IS curve?

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

The LM curve generally determines:

In the Keynesian-cross model, actual expenditures equal:

The theory of liquidity preference implies that the quantity of real money balances demanded is:

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

The intersection of the IS and LM curve determines the values of:

An explanation for the slope of the LM curve is that as:

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

According to the theory of liquidity preference, the supply of real money balances:

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 Ii: Applying 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 IS curve plots the relationship between the interest rate and that arises in the market for .

According to classical theory, national income depends on , while Keynes proposed that determined the level of national income.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by .

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.