Deck 7: Keynesian System III: Policy Effects in the Is-Lm Model

Question 1

Between March and November of 2001,the U.S.economy experienced a recession at the same time that nominal interest rates fell significantly.Using the Keynesian model as the base of your analysis,what does this indicate to you about the cause of the cause of the 2001 recession? Be as specific responsible,using graphs to support your answer.

Answer 1

The fact that interest rates and output fell at the same time indicates that this recession was caused by a fall in the IS curve.

Question 2

The higher the interest sensitivity of investment,the

A)less effective is monetary policy and the more effective is fiscal policy.
C)less effective are both monetary and fiscal policies.
D)less effective is fiscal policy and the more effective is monetary policy.
D)more effective are both monetary and fiscal policies.

Answer 2

D

Question 3

Suppose that both government spending and taxes decrease by $1,000.What happens to aggregate income and interest rates? By how much will they change? Explain using an IS-LM graph to illustrate.

Answer 3

The IS curve will decrease by $1,000 because the government spending multiplier is greater than the tax multiplier by a factor of one.An increase in the IS curve will increase both interest rates and income.

Question 4

Analyze the effects of an increase in expected future profitability in the Keynesian model,making sure to discuss what happens to interest rates and output.Provide graphs to illustrate.

Question 5

Within the IS-LM curve model,a decline in expectations would

A)lower income and the interest rate.
B)increase income and lower the interest rate.
C)lower income,but leave the interest rate unchanged.
D)lower the interest rate,but leave income unchanged.
E)lower income and increase the interest rate.

Question 6

If interest rates and output rises,then

A)government spending may have fallen.
B)the money supply may have risen.
C)taxes may have risen.
D)expectations may have risen.
E)none of the above.

Question 7

According to Figure 7-1,a decrease in the money stock

A)lowers the interest rate to r₁.
B)raises the interest rate to r₂.
C)leaves the interest rate at r₀.
D)None of the above

Question 8

Comparing the simple Keynesian model with the IS-LM model,in the IS-LM model

A)the government spending multiplier is larger.
B)the balanced budget multiplier is larger.
C)the tax multiplier is smaller.
D)there is no difference between any of the multipliers. Figure 7-2

Question 9

By referring to Figure 7-1,an increase in the money stock

A)shifts the LM schedule to the right from LM₀ to LM₁.
B)shifts the LM schedule to the left from LM₀ to LM₂.
C)leaves the LM curve unchanged at LM₀.
D)shifts neither the IS nor the LM schedule.

Question 10

Within the IS-LM curve model,if the government cut taxes at the same time that there was an autonomous increase in investment demand,then

A)income would rise and the interest rate would fall.
B)income and the interest rate would rise.
C)income would rise but the effect on the interest rate is uncertain.
D)the interest rate would rise but the effect on income is uncertain.
E)the effects on both income and the interest rate are uncertain.

Question 11

If changes in expectations drive business cycles,what relationship would we expect to see between interest rates and output in an economy? Explain using an IS-LM graph to illustrate.

Question 12

Changes in all of the following shift the LM curve except

A)the price level.
B)income.
C)the money supply.
D)money demand.
E)all of the above shift LM curve.

Question 13

In the case where money demand is completely interest insensitive (interest elasticity equals zero),an increase in the quantity of money will

A)increase income but leave the interest rate unchanged.
B)increase income and lower the interest rate.
C)lower the interest rate but leave income unchanged.
D)leave both income and the interest rate unchanged.

Question 14

An increase in the money stock has no effect on equilibrium income whenever the

A)IS curve is horizontal.
B)IS curve is vertical.
C)LM curve is vertical.
D)LM curve is horizontal.

Question 15

A simultaneous reduction in both taxes and the money stock will always

A)increase interest rates.
B)lower income and raise the interest rate.
C)lower income and raise the interest rate.
D)increase income.
E)raise income and raise the interest rate.

Question 16

Within the IS-LM curve model,an increase in government spending financed by printing money will always

A)have no impact on income.
B)lower income and raise the interest rate.
C)increase the interest rate.
D)lower the interest rate and increase income.
E)increase income.

Question 17

An decrease in the velocity of money will shift the

A)IS curve up.
B)LM curve up.
C)LM curve down.
D)IS curve down.

Question 18

Assume that there is an increase in perceived bankruptcy risk.As a result of this we would expect to see

A)income and interest rates to rise.
B)money demand and interest rates to fall.
C)money demand and interest rates to rise.
D)money supply to rise and interest rates to fall. Figure 7-1

Question 19

Compare the effects of an autonomous increase in government spending in the IS-LM curve version of the Keynesian model with the effect of the same shift within the classical model.

Question 20

In the liquidity trap case where the LM schedule is nearly horizontal,

A)both monetary and fiscal policy are highly effective.
B)monetary and fiscal policy are ineffective.
C)monetary policy is ineffective and fiscal policy is effective.
D)fiscal policy is ineffective and monetary policy is effective.

Question 21

Exogenous variables in the IS-LM model variables are

A)money supply
B)autonomous consumption
C)government spending
D)prices
E)all of the above Figure 7-4

Question 22

The slope of the LM curve has been shown to depend most crucially on the interest elasticity of

A)consumption.
B)saving.
C)money demand.
D)investment.

Question 23

If the government wanted to reduce interest rates without changing output,it should

A)increase consumption and reduce the money supply.
B)increase the money supply and raise government spending.
C)
C)increase the money supply and raise taxes.
D)both b and

Question 24

As shown in Figure 7-4,for income to be unchanged when there is an autonomous decline in investment,the interest rate would have to

A)rise to r₀.
B)fall to r₂.
C)remain constant at r₁.
D)None of the above

Question 25

According to the modern Keynesian view,

A)both the IS and the LM curve slopes are in the intermediate or normal range,where both monetary and fiscal policies are effective in controlling income.
B)only the IS curve slope is in the intermediate or normal range and,therefore,only fiscal policy is effective in controlling income.
C)only the LM curve slope is in the intermediate or normal range and,therefore,only monetary policy is effective in controlling income.
D)neither the IS nor the LM curve slopes are in the intermediate or normal range and,therefore,neither monetary nor fiscal policies are effective in controlling income.

Question 26

In the case where the LM schedule is relatively steep and the IS schedule is relatively flat,the most effective policy would be a change in

A)money supply.
B)government expenditures.
C)government spending financed by a change in taxes.
D)taxes.

Question 27

An increase in the marginal propensity to hold money

A)results in an fall in the interest rate and a decline in income.
B)raises the interest rate and lowers income.
C)results in a fall in the interest rate and a rise in income.
D)raises both the interest rate and income.

Question 28

If the demand for money is M^d = 100 +.25Y - 100r and then the increase in money demand rises by 100,the LM curve shifts to the

A)right by 400.
B)right by 100.
C)left by 200.
D)left by 400.
E)none of the above.

Question 29

The difference between the simple Keynesian model and the IS-LM curve model is that the latter

A)excludes a money market and interest rates.
B)includes a commodity market and flexible income.
C)excludes a commodity market and interest rates.
D)includes a money market and flexible interest rates. Figure 7-3

Question 30

If the government raised taxes and reduced government spending in order to reduce the budget deficit,monetary policy could accommodate this policy by

A)increasing money demand.
B)increasing money supply.
C)decreasing money supply.
D)increase unemployment insurance.

Question 31

If the level of government spending rises and simultaneously there is a fall in the money stock,we definitely know that

A)income will rise.
B)the change in the interest rate will be ambiguous.
C)income will fall.
D)the interest rate will fall.
E)None of the above

Question 32

In the IS-LM model,an increase in government spending in the goods market has an impact on the money market because

A)it increases the money supply.
B)it increases income,which increases money demand.
C)it decreases income,which decreases money demand.
D)it increases interest rates,which decreases money demand.
E)none of the above.

Question 33

Suppose that the government wants to increase income without changing the interest rate.How can they accomplish this?

A)Increase government spending and reduce the money supply.
B)Increase government spending and the money supply.
C)Increase taxes and the money supply.
D)Reduce government spending and increase the money supply.

Question 34

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

A)LM curve is vertical.
B)IS curve is horizontal.
C)interest rate elasticity of investment is large.
D)interest rate elasticity of investment is small.

Question 35

Monetary policy will be

A)less effective the higher the interest elasticity of investment,and thus the steeper the IS schedule.
B)more effective the higher the interest elasticity of investment,and thus the flatter the IS schedule.
C)equally effective regardless of whether or not the interest elasticity of investment is higher or lower,or the IS curve is flatter or steeper.
D)more effective with a vertical IS curve.

Question 36

Figure 7-2


-With respect to Figure 7-2,an increase in government spending

A)shifts the IS curve to the left by $\Delta$ G(? b/1 ? b).
B)shifts the IS curve to the right by $\Delta$ G(1 ? b/1 ? b).
C)shifts the IS curve to the right by $\Delta$ G(1/1 ? b).
D)does not shift the IS curve.

Question 37

If consumption is given by C = 300 + .6 (Y-T)and I = 300 - 40r,the IS curve is

A)Y = 600 - 2.4T - 40r + G.
B)Y = 600 + .6Y -100r - G
C)Y = 1500 - 1.5T - 100r + 2.5G
D)Y = 1500 + .6T - 100r - G
E)none of the above.

Question 38

As shown in Figure 7-4,an autonomous decline in expectations of future profitability causes the

A)IS schedule to shift to the left.
B)IS schedule to shift to the right.
C)LM schedule to shift to the right.
D)LM schedule to shift to the left.

Question 39

A lower interest elasticity of investment demand leads to a

A)steeper IS curve.
B)flatter IS curve.
C)steeper LM curve.
D)flatter LM curve.

Question 40

If government spending rises but the central bank changes the money supply to prevent income from changing,then

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

Question 41

If income falls without any change in interest rates,then according to the IS-LM model it may be true that:

A)money demand fell and government spending declined.
B)the money supply increased and taxes declined.
C)tight monetary policy and easy fiscal policy.
D)easy monetary policy and easy fiscal policy.

Question 42

The simple Keynesian model

A)overstated the effect of an increase in government spending by neglecting the necessary increase in the interest rate and consequent decline in investment that accompany an increase in government spending.
B)understated the effect of an increase in government spending by neglecting the necessary increase in the interest rate and consequent decline in investment that accompany an increase in government spending.
C)overstated the effect of an increase in government spending by neglecting the necessary decrease in the interest rate and consequent increase in investment that accompany a decrease in government spending.
D)understated the effect of an increase in government spending by neglecting the necessary decrease in the interest rate and consequent decrease in investment that accompany an increase in government spending.

Question 43

If the central bank increases the money supply at the same time as government spending increases,then:

A)interest rates must increase.
B)interest rates must decrease.
C)income must increase.
D)income must decrease.

Question 44

If interest rates fall without any corresponding change in income,then it is possible according to the IS-LM model that

A)money demand fell and government spending declined.
B)the money supply increased and taxes declined.
C)tight monetary policy and easy fiscal policy.
D)easy monetary policy and easy fiscal policy.

Question 45

In Japan,interest rates are close to zero.As a result,Keynesians would argue that money demand

A)has become much more interest rate elastic.
B)will shift upward.
C)has become much less interest rate elastic.
D)will shift downward.
E)will remain unchanged.

Question 46

In the IS-LM model,if interest rates fall while output falls the

A)money supply must have fallen.
B)price level must have fallen.
C)money supply must have risen.
D)level of government spending must have risen.
E)none of the above.

Question 47

During Japan's economic slump in the early 1990s,monetary policy:

A)was highly effective at stimulating income.
B)was caught in a liquidity trap as a result of high inflation and interest rates.
C)was ineffective because of a liquidity trap caused by near zero interest rates.
D)was never even attempted.
E)was the cause of the slump.

Question 48

Changes in all of the following shift the IS curve except

A)the MPC.
B)income.
C)taxes.
D)consumer confidence.
E)all of the above shift IS curve.

Question 49

Whenever fiscal policy actions,such as income tax cuts,are utilized to expand the economy,the Keynesians prefer

A)a contractionary monetary policy.
B)monetary policy to stay the same because of the liquidity trap.
C)accompanying decreases in the money supply that will cause the interest rate to rise and,thus,prevent the crowding out of investment.
D)accompanying increases in the money supply in order to prevent the interest rate from rising and,thus,prevent the crowding out of investment.
E)both b and/or d

Question 50

Traditional Keynesians tend to favor

A)monetary policy over fiscal policy because of the effectiveness of central banks.
B)monetary policy over fiscal policy because it reduces interest rates..
C)fiscal policy over monetary policy because it doesn't impact interest rates.
D)fiscal policy over monetary policy because of the liquidity trap.
E)none of the above.

Question 51

The effect on the level of income of a given increase in the money stock is

A)irrelevant to the interest elasticity of money demand.
B)greater the lower the interest elasticity of money demand.
C)greater the higher the interest elasticity of money demand.
D)None of the above

Question 52

In the simple Keynesian model,government spending

A)have a smaller multiplier than tax changes.
B)can have a larger or smaller multiplier depending upon monetary policy
C)have the same multiplier as changes in taxes.
D)have a greater multiplier than tax changes.

Question 53

A liquidity trap occurs when the

A)LM curve is steep.
B)LM curve is vertical.
C)LM curve is relatively flat.
D)IS curve is flat.