Deck 24: The ISLM World

Question 1

Assume that the Cambridge k = 0.25. If the transactions demand for money is equal to $20,000, then income is equal to

A) $20,000.
B) $80,000.
C) $10,000.
D) $5,000.

Answer 1

D

Question 2

The LM curve shows a series of income-interest rate combinations at which there is equilibrium in the

A) bond market.
B) goods market.
C) saving-investment market.
D) money market.

Answer 2

D

Question 3

The two main determinants of money demand are

A) GDP and the money supply.
B) aggregate supply and aggregate demand.
C) interest rates and income.
D) the inflation rate and the money supply.

Answer 3

C

Question 4

At __________ income levels on the LM curve, the interest rate must be __________.

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

Question 5

The LM curve shows points of equilibrium in the money market and combinations of

A) inflation and unemployment.
B) aggregate supply and aggregate demand.
C) income and the interest rate.
D) money supply and money demand.

Question 6

Liquidity preference theory indicates that at lower interest rates

A) investment is greater.
B) money demand is greater.
C) consumption is greater.
D) money supply is greater.

Question 7

For an individual LM curve, the money supply is assumed to

A) be constant.
B) grow at a rate equal to the interest rate.
C) grow at a rate equal to the growth rate in income.
D) grow at a rate equal to the marginal propensity to consume.

Question 8

Assume that the Cambridge k = .20. If income is equal to $100,000, the transactions demand for money is equal to

A) $20,000.
B) $50,000.
C) $100,000.
D) $500,000.

Question 9

In the LM curve, the __________ the interest-sensitivity of liquidity preference, the __________ the necessary increase in the rate of interest to restore equilibrium.

A) greater; smaller
B) greater; greater
C) smaller; smaller
D) None of the above.

Question 10

Along an LM curve at higher income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

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

Question 11

A weakness of the simple Keynesian model is that it does not recognize that because the transactions demand for money __________ as income increases, the interest rate __________ as income rises.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 12

The LM curve represents combinations of income and the interest rate at which

A) money demand equals money supply when the money supply is fixed.
B) money supply equals money demand when the money demand is fixed.
C) money demand equals money supply when the money supply can vary.
D) money supply equals money demand when both the money supply and money demand can vary.

Question 13

Assume that the Cambridge k = 0.2. If income increases by $20,000, the demand for money will change by

A) $20,000.
B) $10,000.
C) $5,000.
D) $4,000.

Question 14

The slope of the LM curve will be steeper the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

A) less; less
B) less; greater
C) greater; less
D) greater; greater

Question 15

Along an LM curve at higher interest rates there is __________ money demanded, so income must be higher to __________ the demand for transactions balances if the total demand for money is to equal the fixed supply.

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

Question 16

The transactions motive links money demand and

A) interest rates.
B) money supply.
C) the liquidity trap.
D) income.

Question 17

Which of the following influences the slope of the LM curve?

A) The interest-sensitivity of money demand
B) The interest-sensitivity of investment
C) The interest-sensitivity of government spending
D) The interest-sensitivity of saving

Question 18

Along an LM curve at lower interest rates there is __________ money demanded, so income must be lower to __________ the demand for transactions balances if the total demand for money is to equal the fixed supply.

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

Question 19

The slope of the LM is not influenced by

A) the gap between money demand and supply.
B) the interest rate sensitivity of money supply.
C) the interest rate sensitivity of money demand.
D) The slope of the LM curve is influenced by all of the above.

Question 20

Along an LM curve at lower income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

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

Question 21

A falling GDP causes __________ the money demand curve.

A) downward movement along
B) upward movement along
C) a rightward shift of
D) a leftward shift of

Question 22

In the IS curve, at __________ income levels, saving is __________, so the interest rate must be __________ to expand investment.

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

Question 23

A rising GDP causes __________ the money demand curve.

A) downward movement along
B) upward movement along
C) a rightward shift of
D) a leftward shift of

Question 24

Suppose k = 0.2. With a $200 billion increase in the money supply, the LM curve shifts

A) to the right by $40 billion.
B) to the left by $160 billion.
C) to the left by $200 billion.
D) to the right by $1000 billion.

Question 25

Suppose k = 0.25. With a $10 billion decrease in the money supply, the LM curve shifts

A) to the left by $40 billion.
B) to the left by $4 billion.
C) to the left by $2.5 billion.
D) to the right by $0.25 billion.

Question 26

A decrease in money demand will shift the

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

Question 27

At any point below the current LM curve there is an

A) excess demand for money.
B) excess supply of money.
C) excess demand for goods.
D) excess supply of goods.

Question 28

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to a decrease in GDP.

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

Question 29

The slope of the LM curve will be flatter the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

A) less; less
B) less; greater
C) greater; less
D) greater; greater

Question 30

Which of the following is an equilibrium condition for the goods market?

A) M = kPQ
B) Desired saving and desired investment
C) Money demand = money supply
D) IS = LM

Question 31

A decrease in the interest rate causes

A) movement up the IS curve.
B) movement down the LM curve.
C) the IS curve to shift to the left.
D) the LM curve to shift to the right.

Question 32

An increase in the interest rate causes

A) movement up the IS curve.
B) movement down the LM curve.
C) the IS curve to shift to the left.
D) the LM curve to shift to the right.

Question 33

Which of the following is an equilibrium condition for the goods market?

A) MV = PQ
B) Desired expenditure = total production
C) Money demand = money supply
D) IS = LM

Question 34

An increase in money demand will shift the

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

Question 35

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to an increase in GDP.

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

Question 36

Which of the following will cause the LM curve to shift to the left?

A) A decrease in investment
B) A decrease in money demand
C) An increase in velocity
D) A decrease in the money supply

Question 37

At any point above the current LM curve, there is an

A) excess demand for money.
B) excess supply of money.
C) excess demand for goods.
D) excess supply of goods.

Question 38

Which of the following will cause the LM curve to shift to the right?

A) An increase in investment
B) An increase in money demand
C) A decrease in velocity
D) An increase in the money supply

Question 39

The IS curve shows a series of equilibrium points in the goods market for various levels of

A) investment and interest rates.
B) investment and money supply.
C) income and interest rates.
D) inflation and unemployment.

Question 40

The LM curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

A) an increase; money
B) an increase; investment
C) a decrease; money
D) a decrease; investment

Question 41

The slope of the IS curve is influenced by the

A) speculative demand for money.
B) transactions demand for money.
C) velocity of money.
D) marginal propensity to consume.

Question 42

Suppose the marginal propensity to consume is 0.75. A $150 billion increase in government spending shifts the IS curve

A) to the right by $50 billion.
B) to the left by $50 billion.
C) to the left by $600 billion.
D) to the right by $600 billion.

Question 43

Any decrease in autonomous spending will

A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) cause a movement down along an IS curve.
D) cause a movement up along an IS curve.

Question 44

Which of the following will change the position of the IS curve?

A) An increase planned investment spending
B) An increase in interest rates
C) An increase in money demand
D) An increase in the money supply

Question 45

Along an IS curve as income levels __________, saving is smaller, so the interest rate must be __________ to reduce the level of investment so it will be equal to saving.

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

Question 46

The IS curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

A) an increase; money
B) an increase; investment
C) a decrease; money
D) a decrease; investment

Question 47

The slope of the IS curve will be steeper the __________ is the sensitivity of investment to a unit change in the interest rate and the __________ is marginal propensity to save.

A) greater; larger
B) greater; smaller
C) less; larger
D) less; smaller

Question 48

The slope of the IS curve will be flatter the __________ is the sensitivity of investment to a unit change in the interest rate and the __________ is marginal propensity to save.

A) greater; larger
B) greater; smaller
C) less; larger
D) less; smaller

Question 49

Suppose the marginal propensity to consume is 0.8. A $20 billion increase in government spending shifts the IS curve

A) to the right by $100 billion.
B) to the left by $20 billion.
C) to the left by $16 billion.
D) to the right by $2.5 billion.

Question 50

The greater the marginal propensity to consume, the

A) flatter the IS curve will be.
B) steeper the IS curve will be.
C) flatter the LM curve will be.
D) steeper the LM curve will be.

Question 51

Which of the following is an equilibrium condition in the ISLM model?

A) Labor demand = labor supply
B) Desired investment = desired saving
C) Government spending = taxation
D) Money supply = income

Question 52

An increase in government spending will cause the

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

Question 53

At any point above the current IS curve, there is an

A) excess demand for goods.
B) excess supply of goods.
C) excess demand for money.
D) excess supply of money.

Question 54

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be lower to equal the smaller level of investment.

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

Question 55

At any point below the current IS curve, there is an

A) excess demand for goods.
B) excess supply of goods.
C) excess demand for money.
D) excess supply of money.

Question 56

Any increase in autonomous spending will

A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) cause a movement down along an IS curve.
D) cause a movement up along an IS curve.

Question 57

If companies decrease investment spending because of lower expected returns on projects, forecasters should anticipate (everything else the same)that

A) GDP will rise.
B) the money supply will fall.
C) interest rates will fall.
D) saving will increase.

Question 58

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be higher to equal the higher level of investment.

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

Question 59

The smaller the marginal propensity to consume, the

A) flatter the IS curve will be.
B) steeper the IS curve will be.
C) flatter the LM curve will be.
D) steeper the LM curve will be.

Question 60

Along an IS curve as income levels __________, saving is larger, so the interest rate must be __________ to expand the level of investment so it will be equal to saving.

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

Question 61

In the ISLM framework, monetary policy has the greatest impact on equilibrium income

A) when money demand = money supply.
B) when money supply is infinitely elastic.
C) when the interest rate is high.
D) the less is the interest-sensitivity of money demand.

Question 62

Starting from equilibrium in the ISLM framework, a decrease in money demand results in

A) a rise in income and the interest rate.
B) a rise in income and a decline in the interest rate.
C) a decline in income and the interest rate.
D) a decline in income and a rise in the interest rate.

Question 63

Under the Classical assumptions, an increase in government spending causes

A) income to rise.
B) income to fall.
C) interest rates to rise.
D) interest rates to fall.

Question 64

Crowding out occurs when

A) investment increases as government spending falls.
B) investment increases when government spending rises.
C) investment decreases when government spending falls.
D) investment decreases when government spending rises.

Question 65

In the ISLM framework, the impact of monetary policy on equilibrium income is less when

A) money demand = money supply.
B) money demand is infinitely elastic.
C) the interest rate is low.
D) the investment function has lower interest-sensitivity.

Question 66

"The price level may fall but it will not necessarily lower the interest rate, not if we are in a liquidity trap." This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession.

A) Classical; will
B) Classical; may not be able to
C) Keynesian; will
D) Keynesian; may not be able to

Question 67

In the ISLM framework, monetary policy has the greatest impact on equilibrium income when

A) money demand = money supply.
B) money demand is infinitely elastic.
C) the interest rate is low.
D) the investment function is highly interest-sensitive.

Question 68

Which of the following is an equilibrium condition in the ISLM model?

A) Labor demand = labor supply
B) Actual saving = desired saving
C) Government spending = taxation
D) Money supply = money demand

Question 69

In IS-LM analysis, the nominal interest rate is

A) purely a monetary phenomenon.
B) purely a real phenomenon.
C) both a monetary and a real phenomenon.
D) neither a real nor a monetary phenomenon, but determined by government policy.

Question 70

In the ISLM framework, monetary policy has the greatest impact on equilibrium income

A) when desired saving = desired saving.
B) when money supply is infinitely elastic.
C) the greater is the interest-sensitivity of money demand.
D) when the interest rate is rising.

Question 71

"A lower price level may lower the interest rate, but investment demand may not respond to this." This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession.

A) Classical; will
B) Classical; may not be able to
C) Keynesian; will
D) Keynesian; may not be able to

Question 72

Starting from equilibrium and using the ISLM framework, an increase in investment leads to

A) lower interest rates and higher income.
B) higher interest rates and higher income.
C) lower interest rates and lower income.
D) higher interest rates and lower income.

Question 73

Assume that you are a policy adviser who believes that money demand is highly interest-sensitive but investment is not. Asked your advice on how to pull the economy out of a recession, you are likely to emphasize

A) contractionary monetary policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) expansionary fiscal policy.

Question 74

Starting from equilibrium in the ISLM framework, an increase in money demand results in

A) a rise in income and the interest rate.
B) a rise in income and a decline in the interest rate.
C) a decline in income and the interest rate.
D) a decline in income and a rise in the interest rate.

Question 75

Complete crowding out occurs when the

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

Question 76

The flatter is the LM curve

A) the more effective is fiscal policy.
B) the less effective is fiscal policy.
C) the less is the interest sensitivity of saving.
D) the less is the interest sensitivity of the money supply.

Question 77

"Even if there is a liquidity trap or interest-insensitive investment, a falling price level will increase the real money supply and real wealth, and this impacts consumption." This is a statement a __________ economist might make as an explanation of why the economy __________ pull itself out of a recession.

A) Classical; will
B) Classical; may not be able to
C) Keynesian; will
D) Keynesian; may not be able to

Question 78

The steeper the LM curve

A) the more effective is monetary policy.
B) the less effective is monetary policy.
C) the greater is the interest-sensitivity of investment.
D) the greater is the interest-sensitivity of the money supply.

Question 79

Starting from equilibrium and using the ISLM framework, a decrease in investment leads to

A) lower interest rates and higher income.
B) higher interest rates and higher income.
C) lower interest rates and lower income.
D) higher interest rates and lower income.

Question 80

Crowding out would not occur if the

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