Deck 5: Goods and Financial Markets: the Islm Model

Question 1

An increase in the money supply must cause which of the following?

A) An upward shift in the LM curve.
B) A decrease in the interest rate and ambiguous effects on investment.
C) An increase in investment and a rightward shift in the IS curve.
D) No change in output if investment is independent of the interest rate.
E) No change in the interest rate if investment is independent of the interest rate.

Answer 1

No change in output if investment is independent of the interest rate.

Question 2

Which of the following will cause a shift in the LM curve?

A) An increase in money supply.
B) An increase in firm confidence.
C) An increase in the interest rate.
D) An increase in taxes.
E) An increase in output.

Answer 2

An increase in money supply.

Question 3

We know with certainty that a decrease in tax must cause which of the following?

A) A decrease in output if the central bank simultaneously pursues a contractionary monetary policy.
B) An increase in the interest rate and an increase in investment.
C) An increase in the interest rate and a decrease in investment.
D) An increase in the interest rate and an upward shift in the LM curve.
E) An increase in the interest rate and an ambiguous effect on investment.

Answer 3

An increase in the interest rate and an ambiguous effect on investment.

Question 4

Suppose there is a simultaneous tax increase and open market purchase of bonds. Which of the following must occur as a result of this policy mix?

A) Output decreases.
B) Output increases.
C) The interest rate increases.
D) The interest rate decreases.
E) Both output and the interest rate increase.

Question 5

An increase in the reserve deposit ratio, 8, will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 6

Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a decrease in money supply:

A) will cause investment to increase.
B) may cause investment to increase or to decrease.
C) will have no effect on output.
D) will cause a reduction in output and have no effect on the interest rate.
E) will cause investment to decrease.

Question 7

Suppose there is a decrease in consumer confidence and the central bank controls the interest rate. Which of the following represents the complete list of variables that must decrease in response to this consumer pessimism?

A) Consumption.
B) Consumption and output.
C) Consumption and investment.
D) Consumption, output and the interest rate.
E) Consumption, investment and output.

Question 8

An increase in the budget deficit decreasing the level of investment is known as:

A) the crowding out of investment.
B) the crowding out of the budget deficit.
C) the crowding in of investment.
D) the crowding out of output.
E) the crowding in of the budget deficit.

Question 9

Suppose the economy is currently operating on both the IS curve and the LM curve. Which of the following is true for this economy?

A) Financial markets are in equilibrium.
B) The money supply equals money demand.
C) Production equals demand.
D) The quantity supplied of bonds equals the quantity demanded for bonds.
E) All of the above.

Question 10

Suppose there is a simultaneous RBA sale of bonds and increase in government spending. We know with certainty that this combination of policies must cause:

A) a decrease in i.
B) a decrease in Y.
C) an increase in Y.
D) an increase in i.
E) an increase in M.

Question 11

A decrease in the aggregate price level, P, will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 12

Suppose there is a simultaneous tax increase and open market sale of bonds. Which of the following must occur as a result of this?

A) Output increases.
B) Output decreases.
C) The interest rate increases.
D) The interest rate decreases.
E) Both output and the interest rate increase.

Question 13

Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that:

A) the money market and goods market are in equilibrium and the bond market is not in equilibrium.
B) the money market and bond markets are in equilibrium and the goods market is not in equilibrium.
C) the goods market is in equilibrium and the money market is not in equilibrium.
D) the money, bond and goods markets are all in equilibrium.
E) neither the money, bond, nor goods markets are in equilibrium.

Question 14

Which of the following will occur if there is an increase in consumer confidence?

A) The IS curve will shift rightward.
B) The LM curve will shift down.
C) The LM curve will shift up.
D) The IS curve will shift leftward, and the LM curve will shift down.
E) The IS curve will shift leftward.

Question 15

An increase in consumer confidence will likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A rightward shift in the IS curve and an upward shift in the LM curve.

Question 16

Suppose there is an RBA purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause:

A) an increase in Y.
B) a decrease in M.
C) a decrease in i.
D) an increase in i.
E) a decrease in Y.

Question 17

Suppose there is a simultaneous tax decrease and open market sale of bonds. Which of the following must occur as a result of this policy mix?

A) Output increases.
B) The interest rate decreases.
C) Output decreases.
D) The interest rate increases.
E) Both output and the interest rate decrease.

Question 18

An increase in the budget deficit increasing the level of investment is known as:

A) the crowding out of investment.
B) the crowding out of budget deficit.
C) the crowding in of budget deficit.
D) the crowding out of output.
E) the crowding in of investment.

Question 19

Suppose there is a tax cut and the central bank controls the money supply. Which of the following is a complete list of the variables that must increase as a result of the tax cut?

A) Consumption and output.
B) Consumption.
C) Consumption, output and investment.
D) Consumption and investment.
E) Consumption, output and the interest rate.

Question 20

A decrease in government spending will cause:

A) a rightward shift in the IS curve.
B) a leftward shift in the IS curve.
C) an upward shift in the LM curve.
D) a downward shift in the LM curve.
E) a rightward shift in the IS curve and a downward shift in the LM curve.

Question 21

Which of the following best defines the IS curve?

A) Illustrates the effects of changes in i on desired money holdings by individuals.
B) The combinations of i and Y that maintain equilibrium in the goods market.
C) The combinations of i and Y that maintain equilibrium in the financial markets.
D) Illustrates the effects of changes in Y on investment.
E) Illustrates the effects of changes in i on investment.

Question 22

In the IS- LM model, an increase in the money supply will cause an increase in which of the following variables?

A) Output.
B) Consumption.
C) Investment.
D) All of the above.
E) None of the above.

Question 23

Suppose there is a decrease in consumer confidence and the central bank controls the money supply. Which of the following represents the complete list of variables that must decrease in response to this consumer pessimism?

A) Consumption and investment.
B) Consumption and output.
C) Consumption, investment and output.
D) Consumption.
E) Consumption, output and the interest rate.

Question 24

We know with certainty that a tax cut must cause which of the following?

A) An increase in output.
B) An increase in investment.
C) A decrease in output.
D) A decrease in the interest rate.
E) No change in output.

Question 25

Suppose the current level of output and the interest rate are such that the economy is operating on neither the IS nor LM curve. Which of the following is true for this economy?

A) Financial markets are not in equilibrium.
B) The money supply does not equal money demand.
C) Production does not equal demand.
D) The quantity supplied of bonds does not equal the quantity demanded for bonds.
E) All of the above.

Question 26

Based on our understanding of the IS- LM model that takes into account dynamics, we know that a decrease in government spending will cause:

A) an immediate decrease in i and no initial change in Y.
B) a gradual increase in i and a gradual decrease in Y.
C) a gradual decrease in i and a gradual decrease in Y.
D) a gradual decrease in i and a gradual increase in Y.
E) an immediate decrease in Y and immediate increase in i.

Question 27

A reasonable dynamic assumption for the IS- LM model is that:

A) the economy is always on the LM curve, but moves only slowly to the IS curve.
B) the output market is quick to adjust, but the money market adjusts more slowly.
C) the economy is always on both the IS and LM curves.
D) adjustment to the new IS- LM equilibrium is instantaneous after an LM shift, but not after an IS shift.
E) the economy is always on the IS curve, but moves only slowly to the LM curve.

Question 28

Suppose there is a simultaneous tax increase and open market purchase of bonds. Which of the following must occur as a result of this?

A) Output increases.
B) Output decreases.
C) The interest rate increases.
D) The interest rate decreases.
E) Both output and the interest rate increase.

Question 29

Assume that investment does not depend on the interest rate. An increase in the money supply will cause which of the following for this economy?

A) A decrease in output.
B) An increase in the interest rate.
C) An increase in investment.
D) No change in investment.
E) A decrease in investment.

Question 30

The IS curve will not shift when which of the following occurs?

A) A decrease in government spending.
B) A decrease in firm confidence.
C) A decrease in consumer confidence.
D) A decrease in taxes.
E) A decrease in the interest rate.

Question 31

Based on our understanding of the IS- LM model that takes into account dynamics, we know that a decrease in the money supply will cause:

A) a gradual increase in Y and a gradual decrease in i.
B) an immediate decrease in i and an immediate increase in Y.
C) a gradual increase in i and a gradual decrease in Y.
D) an immediate increase in i and no initial change in Y.
E) an immediate decrease in Y and an immediate increase in i.

Question 32

Which of the following statements is consistent with a given LM curve?

A) An increase in output causes an increase in demand for goods.
B) An increase in the interest rate causes investment spending to decrease.
C) An increase in the interest rate causes money demand to decrease.
D) An increase in output causes an increase in money demand.
E) An increase in the interest rate causes a decrease in the money supply.

Question 33

A decrease in consumer confidence will likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A rightward shift in the IS curve and an upward shift in the LM curve.

Question 34

Assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in government spending:

A) will cause investment to increase.
B) may cause investment to increase or to decrease.
C) will have no effect on investment.
D) will cause an increase in investment if the interest rate decreases.
E) will cause investment to decrease.

Question 35

Assume that investment does not depend on the interest rate. A decrease in government spending will cause which of the following for this economy?

A) An increase in the interest rate.
B) An increase in output.
C) No change in investment.
D) An increase in investment.
E) A decrease in investment.

Question 36

Suppose fiscal policy makers implement a policy to increase the size of a budget deficit. Based on the IS- LM model, we know with certainty that the following will occur as a result of this fiscal policy action:

A) The price level increases.
B) Output increases.
C) Investment spending decreases.
D) Output decreases.
E) Investment spending increases.

Question 37

Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a decrease in government spending:

A) causes an increase in output and has no effect on the interest rate.
B) has no effect on output.
C) has no effect on investment.
D) causes investment to increase.
E) causes investment to decrease.

Question 38

Based on our understanding of the IS- LM model, we know with certainty that the policy mix in Australia in response to the global crisis would have resulted in:

A) an increase in the interest rate.
B) an increase in output.
C) no change in output.
D) a decrease in the interest rate.
E) a decrease in output.

Question 39

A RBA sale of securities will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 40

Under the reasonable dynamic assumptions, a temporary monetary contraction should result in:

A) an immediate rise in the interest rate, and then a further rise over time.
B) an immediate rise in the interest rate, and no further interest rate changes.
C) an immediate rise in the interest rate, and then a fall in the interest rate over time.
D) no change in the interest rate initially, and then a sudden rise to its new equilibrium value.
E) a very gradual but steady rise in the interest rate to its new equilibrium level.

Question 41

Which of the following best defines the LM curve?

A) Illustrates the effects of changes in M on investment.
B) Illustrates the effects of changes in Y on money supply.
C) The combinations of i and Y that maintain equilibrium in the financial markets.
D) The combinations of i and Y that maintain equilibrium in the goods market.
E) Illustrates the effects of changes in i on desired money holdings by individuals.

Question 42

A RBA purchase of securities will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 43

Which of the following statements is consistent with a given IS curve?

A) An increase in the interest rate causes money demand to decrease.
B) An increase in taxes causes an increase in demand for goods.
C) An increase in government spending causes a decrease in demand for goods.
D) An increase in the interest rate causes investment spending to decrease.
E) An increase in the interest rate causes a decrease in the money supply.

Question 44

The IS curve will not shift when which of the following occurs?

A) An increase in firm confidence.
B) An increase in taxes.
C) An increase in consumer confidence.
D) An increase in the money supply.
E) An increase in government spending.

Question 45

Which of the following is the definition for the real supply of money?

A) The ratio of real GDP to the nominal money supply.
B) The actual quantity of money, rather than the officially reported quantity.
C) The real value of currency in circulation only.
D) The stock of money measured in terms of dollars.
E) The stock of money measured in terms of goods, not dollars.

Question 46

Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know with certainty that this combination of policies must cause:

A) an increase in i.
B) a decrease in Y.
C) a decrease in M.
D) a decrease in i.
E) an increase in Y.

Question 47

Which of the following will cause a shift in the IS curve?

A) An increase in taxes.
B) An increase in government spending.
C) An increase in consumer confidence.
D) An increase in firm confidence.
E) All of the above.

Question 48

Which of the following is true for a given point on the LM curve?

A) Inventory investment equals zero.
B) The bond market is in equilibrium.
C) The goods market is in equilibrium.
D) Production is equal to demand.
E) The financial markets are in equilibrium.

Question 49

Assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, a decrease in government spending:

A) will cause investment to increase.
B) may cause investment to increase or to decrease.
C) will have no effect on investment.
D) will cause an increase in investment if the interest rate decreases.
E) will cause investment to decrease.

Question 50

A decrease in the money supply must cause which of the following?

A) An increase in the interest rate and ambiguous effects on investment.
B) A downward shift in the LM curve.
C) A decrease in investment and a leftward shift in the IS curve.
D) No change in output if investment is independent of the interest rate.
E) No change in the interest rate if investment is independent of the interest rate.

Question 51

Which of the following describes the policy mix of the Gillard Labor government in Australia and the Reserve Bank of Australia in 2012?

A) Fiscal expansion and monetary expansion.
B) Fiscal expansion and monetary contraction.
C) Fiscal expansion and tax contraction.
D) Fiscal contraction and monetary expansion.
E) Fiscal contraction and monetary contraction.

Question 52

Which of the following describes the Australian policy mix in response to the global crisis in 2008- 09?

A) Fiscal expansion and tax contraction.
B) Fiscal expansion and monetary contraction.
C) Fiscal expansion and monetary expansion.
D) Fiscal contraction and monetary expansion.
E) Fiscal contraction and monetary contraction.

Question 53

Which of the following describes the US policy mix during the 2001 recession?

A) Expansionary fiscal policy and expansionary monetary policy.
B) Contractionary fiscal policy and contractionary monetary policy.
C) Contractionary fiscal policy and expansionary monetary policy.
D) Expansionary fiscal and contractionary tax policy.
E) Expansionary fiscal policy and contractionary monetary policy.

Question 54

Suppose there is a fiscal expansion and the central bank controls the interest rate. Which of the following is a complete list of the variables that must increase as a result of the fiscal expansion?

A) Consumption and output.
B) Consumption, output and the interest rate.
C) Consumption, output and investment.
D) Consumption and investment.
E) Consumption.

Question 55

Suppose there is a simultaneous tax cut and open market sale of bonds. Which of the following must occur as a result of this?

A) Output increases.
B) Output decreases.
C) The interest rate increases.
D) The interest rate decreases.
E) Both output and the interest rate increase.

Question 56

Which of the following is the correct definition of the IS curve?

A) The IS curve represents the single level of output where financial markets are in equilibrium.
B) The IS curve represents the combinations of output and the interest rate where the financial markets are in equilibrium.
C) The IS curve represents the single level of output where the goods market is in equilibrium.
D) The IS curve represents the combinations of output and the interest rate where the money market is in equilibrium.
E) The IS curve represents the combinations of output and the interest rate where the goods market is in equilibrium.

Question 57

Suppose the central bank decides to conduct an open market sale of bonds. Which of the following will occur as a result of this monetary policy action?

A) The LM curve shifts up.
B) The LM curve shifts down.
C) The IS curve shifts leftward as the interest rate decreases.
D) The IS curve shifts rightward as the interest rate increases.
E) The LM curve shifts up and the IS curve shifts leftward.

Question 58

An increase in government spending will cause:

A) a rightward shift in the IS curve.
B) a leftward shift in the IS curve.
C) an upward shift in the LM curve.
D) a downward shift in the LM curve.
E) a rightward shift in the IS curve and a downward shift in the LM curve.

Question 59

Suppose there is a simultaneous tax cut and open market purchase of bonds. Which of the following must occur as a result of this?

A) Output increases.
B) Output decreases.
C) The interest rate increases.
D) The interest rate decreases.
E) Both output and the interest rate increase.

Question 60

An increase in the aggregate price level, P, will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 61

We know with certainty that an increase in tax must cause which of the following?

A) A decrease in the interest rate and an ambiguous effect on investment.
B) No change in output if the central bank simultaneously pursues a contractionary monetary policy.
C) A decrease in the interest rate and an upward shift in the LM curve.
D) A decrease in the interest rate and an increase in investment.
E) A decrease in the interest rate and a decrease in investment.

Question 62

Explain: (1) what happens to income, money demand, the interest rate, and output when an increase in government spending is implemented and (2) what happens to the position of the LM curve as a result of the fiscal expansion if the central bank controls the interest rate.

Question 63

Explain (1) what happens to the interest rate, investment, demand, and output when the central bank pursues contractionary monetary policy and (2) what happens to the position of the IS curve as the central bank pursues contraction monetary policy.

Question 64

Explain the determinants of investment and how a change in each determinant affects investment.

Question 65

Suppose there is a simultaneous central bank sale of bonds and tax increase. We know with certainty that this combination of policies must cause:

A) a decrease in Y.
B) an increase in i.
C) an increase in M.
D) a decrease in i.
E) an increase in Y.

Question 66

First, briefly explain what is meant by the policy mix. Second, explain what effect different policy mixes might have on the level of output, investment, and the interest rate.

Question 67

Use the IS- LM model that incorporates dynamics and explain the effect on output, the interest rate, and investment when the central bank cuts the interest rate.

Question 68

Which of the following will occur if there is a decrease in taxes?

A) Neither the IS nor the LM curve shifts.
B) The IS curve shifts and the economy moves along the LM curve.
C) Both the IS and LM curves shift.
D) Output will change causing a change in money demand and a shift of the LM curve.
E) The LM curve shifts and the economy moves along the IS curve.

Question 69

Explain: (1) what happens to income, money demand, the interest rate, and output when an increase in tax is implemented and (2) what happens to the position of the LM curve as a result of the fiscal contraction.

Question 70

First, define the LM curve. Second, explain why it has its particular shape.

Question 71

Use the IS- LM model that incorporates dynamics and explain the effect on output, the interest rate, and investment when the government increases taxes. Assume that the central bank controls the interest rate.

Question 72

Use the IS- LM model to answer this question and assume the central bank controls the money supply. Suppose there is a simultaneous decrease in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.

Question 73

A decrease in the reserve deposit ratio, 8, will most likely have which of the following effects?

A) A rightward shift in the IS curve.
B) A leftward shift in the IS curve.
C) An upward shift in the LM curve.
D) A downward shift in the LM curve.
E) A downward shift in the IS curve and an upward shift in the LM curve.

Question 74

Based on your understanding of the IS- LM model, graphically illustrate and explain what effect a decrease in consumer confidence will have on output, the interest rate, and investment.

Question 75

Explain in detail what effect a central bank purchase of bonds will have on: (1) the LM curve and (2) the IS curve.

Question 76

Assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, an increase in money supply:

A) will cause investment to increase.
B) may cause investment to increase or to decrease.
C) will have no effect on output.
D) will cause a reduction in output and have no effect on the interest rate.
E) will cause investment to decrease.

Question 77

Explain in detail what effect a decrease in government spending will have on: (1) the LM curve and (2) the IS curve.

Question 78

Explain: (1) what happens to income, money demand, the interest rate, and output when an increase in tax is implemented and (2) what happens to the position of the LM curve as a result of the fiscal contraction if the central bank controls the money supply.

Question 79

We know with certainty that a tax hike must cause which of the following?

A) An increase in output.
B) A decrease in investment.
C) No change in output.
D) A decrease in output.
E) An increase in the interest rate.

Question 80

Use the IS- LM model to answer this question and assume that the central bank controls the interest rate. Suppose there is a simultaneous increase in taxes and interest rate cut. Explain what effect this particular policy mix will have on output and the money supply. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.