Deck 11: Money, interest, and income

Question 1

If the quantity of money demanded exceeds the quantity supplied at the current interest rate, then

A)bond prices and the interest rate will both rise
B)bond prices and the interest rate will both fall
C)bond prices will rise and the interest rate will fall
D)bond prices will fall and the interest rate will rise
E)the value of both stocks and bonds will increase

Answer 1

bond prices will fall and the interest rate will rise

Question 2

A decrease in autonomous investment

A)results in a shift of the IS-curve to the left
B)results in a shift of the IS-curve to the right
C)occurs as we move along the IS-curve from right to left
D)occurs as we move along the IS-curve from left to right
E)is caused by an increase in government expenditures

Answer 2

results in a shift of the IS-curve to the left

Question 3

If investment becomes more responsive to changes in the interest rate, then

A)the size of the government spending multiplier will increase
B)a given increase in the interest rate will lead to a larger increase in income
C)the IS-curve will become flatter
D)the IS-curve will become steeper
E)both A and C

Answer 3

the IS-curve will become flatter

Question 4

If the level of government transfer payments increases while everything else stays the same, then

A)the IS-curve will shift to the left
B)the IS-curve will shift to the right
C)the IS-curve will become flatter and shift to the right
D)the LM-curve will shift to the right
E)the LM-curve will become flatter and shift to the right

Question 5

We can expect the IS-curve to get steeper, as

A)money demand becomes less sensitive to changes in the interest rate
B)the marginal propensity to save increases
C)investment becomes more sensitive to changes in the interest rate
D)the income tax rate decreases
E)the expenditure multiplier increases

Question 6

Which of the following is the equation for the IS-curve?

A) i = (1/b)Ao + (b/ )Y
B) i = (1/b)Ao – (b/11ec9559_73b2_faec_8111_955487fce77c_TB3519_11 )Y
C) i = (k/h)Y + (1/h)(M/P)
D)i = (k/h)Y – (1/h)(M/P)
E) L = kY – hi

Question 7

The two major determinants of the level of private investment spending are

A)the interest rate and business expectations
B)the levels of consumption and saving
C)the levels of national income and saving
D)corporate income taxes and the level of saving
E)interest rates and the level of private saving

Question 8

Which of the following government policy actions will result in a parallel shift of the IS-curve to the left?

A)a decrease in government purchases
B)an increase in government purchases
C)an increase in transfer payments
D)a decrease in the income tax rate
E)an increase in the income tax rate

Question 9

Looking at the behavior of interest rates over time, we realize that

A)they tend to fall before a recession
B)they tend to be high before a recession and fall during a recession
C)they tend to rise in a recovery and fall in a recession
D)they tend to be high in a recession
E)both B and C

Question 10

From which of the following equations can the equation for the IS-curve be derived?

A)I + G + NX = S + TA - TR
B)Y = C + I + G + NX
C)M/P = kY - hi
D)MV = PY
E)both A and B

Question 11

In which of the following years were interest rates on U.S.Treasury bills the highest in the last four decades?

A)1976
B)1981
C)1996
D)2002
E)2006

Question 12

Which of the following will NOT cause a shift of the IS-curve?

A)a change in transfer payments
B)a change in taxes
C)a change in money demand
D)a change in business and consumer confidence
E)a change in autonomous saving

Question 13

The IS-curve will become flatter if

A)money demand increases
B)investment becomes less sensitive to changes in the interest rate
C)the marginal propensity to save increases
D)the income tax rate is reduced
E)either B or C occurs

Question 14

Which of the following will occur in an IS-LM model, if the government decides to raise the income tax rate?

A)the IS-curve will become flatter and shift to the right
B)the IS-curve will become steeper and shift to the left
C)the IS-curve will shift parallel to the left
D)the LM-curve will become steeper and shift to the right
E)the LM-curve will shift parallel to the right

Question 15

Which of the following is TRUE as we move along the IS-curve?

A)a lower interest rate is compatible with a higher equilibrium output level
B)a higher equilibrium output level is compatible with a higher interest rate
C)a lower equilibrium income level is compatible with a higher level of transactions demand for money
D)a higher interest rate is compatible with a higher level of equilibrium income and therefore a higher level of consumption
E)a higher interest rate is compatible with higher asset prices and therefore a higher level of saving

Question 16

The level of investment spending is affected by changes in the interest rate, since higher interest rates

A)will increase the cost of borrowing and thus lower the incentive to purchase capital equipment
B)will make it more profitable to invest in the stock market
C)will increase the return on saving
D)will lower the value of government bonds so banks will lend more to firms and less to the government
E)all of the above

Question 17

Interest rate changes have an important side effect on the economy since even a small change in interest rates can significantly change

A)the composition of output demanded
B)the level of private saving
C)the level of consumption
D)the level of government spending
E)none of the above

Question 18

In an IS-LM model, any point that is to the left and below the IS-curve indicates a situation where

A)there is excess demand for goods and services in the expenditure sector
B)there is excess supply of goods and services in the expenditure sector
C)the expenditure sector is in equilibrium but the money sector is not
D)there is excess demand for money in the money sector
E)there is excess supply of money in the money sector

Question 19

We can expect the IS-curve to become flatter as

A)the supply of money decreases
B)the marginal propensity to consume decreases
C)the income tax rate increases
D)investment becomes more sensitive to interest rate changes
E)money demand becomes more sensitive to interest rate changes

Question 20

In the IS-LM model, the interest rate serves as a link between

A)household saving and business investment
B)government spending and consumer spending
C)actions of the central bank and changes in consumer spending
D)the goods market and the assets market
E)domestic markets and foreign markets

Question 21

In an IS-LM model, an increase in the money supply will

A)lower interest rates and therefore decrease the level of saving and investment
B)lower interest rates, stimulate investment spending, and increase national income
C)lower interest rates and bond prices and decrease money demand
D)stimulate investment spending, shifting both the LM- and IS-curves to the right
E)increase government spending since more funds become available

Question 22

Which of the following will result in a parallel shift of the LM-curve to the right?

A)an increase in interest rates
B)an increase in autonomous saving
C)an increase in money supply
D)an increase in money demand
E)an increase in investment

Question 23

Monetary policy becomes more effective as

A)the interest sensitivity of investment increases
B)money demand becomes less sensitive to changes in the interest rate
C)the marginal propensity to save decreases
D)the income tax rate decreases
E)all of the above

Question 24

In the money sector, other things being the same, an increase in the supply of money will cause

A)a decrease in the demand for bonds
B)a decrease in interest rates
C)a decrease in bond prices
D)a decrease in stock values
E)both C and D

Question 25

In an IS-LM model, an increase in autonomous spending

A)is caused by a fall in the interest rate
B)will cause a fall in the interest rate
C)will lead to an increase in income and the interest rate
D)will shift the LM-curve to the right
E)is caused by a movement along the IS-curve from left to right

Question 26

The LM-curve becomes steeper if

A)money demand becomes less sensitive to changes in the interest rate
B)money demand becomes more sensitive to changes in the interest rate
C)investment becomes more sensitive to changes in the interest rate
D)investment becomes less sensitive to changes in the interest rate
E)money demand becomes less sensitive to changes in income

Question 27

The monetary policy multiplier is large if

A)the LM-curve is steep and the IS-curve is flat
B)the LM-curve is flat and the IS-curve is steep
C)money demand is very interest sensitive
D)investment is very interest insensitive
E)both money supply and money demand are very interest sensitive

Question 28

In an IS-LM model, an increase in the personal income tax rate will

A)lower consumption and the interest rate but increase investment
B)lower consumption and investment but increase the interest rate
C)increase aggregate money demand and therefore cause interest rates to increase
D)increase the expenditure multiplier
E)decrease real money balances

Question 29

In an IS-LM model, a decrease in the level of government purchases will result in

A)a decrease in the level of consumption
B)an increase in the level of investment
C)an increase in real money balances
D)a decrease in money supply
E)both A and B

Question 30

If money demand becomes more income elastic, then the LM-curve will

A)shift parallel to the right
B)shift parallel to the left
C)become steeper
D)become flatter
E)become flatter and shift to the right

Question 31

If we change the assumption that money supply is fixed but instead assume that the amount of money supplied increases as the interest rate increases, then

A)the LM-curve will become flatter
B)the LM-curve will become steeper
C)the LM-curve will shift to the left
D)monetary policy will be more effective
E)both A and D

Question 32

In an IS-LM model, an increase in money supply will

A)increase income, the interest rate and investment
B)increase income but decrease the interest rate and investment
C)increase income and investment but decrease the interest rate
D)increase income and consumption but leave the interest rate unchanged
E)increase the interest rate and investment but leave consumption unchanged

Question 33

In an IS-LM framework, a decrease in money supply will lead to

A)an increase in aggregate money demand
B)an increase in both income and the interest rate
C)an increase in the interest rate and a decrease in income
D)a decrease in the size of the monetary policy multiplier
E)both A and C

Question 34

Which of the following is the equation for the LM-curve?

A)L= kY + hi
B)L = kY - hi
C)i = (k/h)Y + (1/h)(M/P)
D)i = (1/h)[kY - (M/P)]
E)i = (1/b)A? - (b/?)Y

Question 35

If there is a decrease in government transfer payments

A)the IS-curve will become flatter and shift to the right
B)the IS-curve will become steeper and shift to the left
C)the IS-curve will shift to the left
D)the LM-curve will shift to the left
E)the LM-curve will become steeper and shift to the left

Question 36

In an IS-LM model, a decrease in autonomous saving will

A)decrease income but increase the interest rate
B)shift the LM-curve to the left
C)shift the IS-curve to the left
D)increase both income and the interest rate
E)decrease both income and the interest rate

Question 37

People will hold more money if they expect

A)bond prices to rise
B)yields on bonds to fall
C)yields on bonds to rise
D)the government budget surplus to increase
E)to get paid more frequently

Question 38

The LM-curve

A)shows the relationship between the interest rate and the level of investment spending
B)is negatively sloped because increases in the income level can only be achieved if the interest rate is lowered
C)is negatively sloped since increases in money supply always lower interest rates
D)is upward sloping because a higher income level is always associated with a higher nominal money supply
E)shows combinations of the interest rate and the income level such that money supply and money demand are equal

Question 39

If the central bank increases money supply, then real money balances will rise and

A)so will the interest rate
B)the interest rate will fall
C)the LM-curve will shift to the left
D)the IS-curve will shift to the right
E)asset prices will fall

Question 40

In an IS-LM model, if the government decides to cut welfare spending,

A)the interest rate will decrease while personal saving will increase
B)the interest rate and the level of consumption will both decrease
C)the interest rate will decrease while income tax revenue will increase
D)the federal budget deficit will decrease and the level of output will increase
E)none of the above

Question 41

An increase in the fiscal policy multiplier can be caused by

A)an increase in the interest sensitivity of investment
B)an increase in the interest sensitivity of money demand
C)a decrease in the interest sensitivity of money demand
D)an increase in the income tax rate
E)a decrease in autonomous saving

Question 42

If investment becomes more sensitive to changes in the interest rate, then

A)the size of the fiscal policy multiplier will decrease
B)the size of the fiscal policy multiplier will increase
C)the size of the monetary policy multiplier will decrease
D)the size of the monetary policy multiplier will increase
E)both A and D

Question 43

Which of the following is the equation for the AD-curve?

A)
B)
C)
D)
E)

Question 44

An increase in the interest sensitivity of money demand will

A)increase the size of the monetary policy multiplier
B)decrease the size of the monetary policy multiplier
C)make fiscal policy less effective
D)make the LM-curve steeper
E)both A and D

Question 45

If money demand becomes more sensitive to changes in income, then

A)the LM-curve will become flatter
B)the LM-curve will become steeper
C)the AD-curve will become flatter
D)fiscal policy will be more effective
E)both B and C

Question 46

If the marginal propensity to save suddenly increases, then

A)the size of the fiscal policy multiplier will become larger
B) the size of the monetary policy multiplier will increase
C)the IS-curve will become steeper
D)the IS-curve will shift to the right and income will increase
E)income will increase but the interest rate will decrease

Question 47

The movement along the AD-curve from left to right is equivalent to a shift of

A)the LM-curve to the right due to an increase in real money balances
B)the IS-curve to the right due to a decrease in interest rates
C)the LM-curve to the right due to an increase in nominal money supply
D)the IS-curve to the right due to a lower price level
E)both the IS- and LM-curves to the right due to more spending and higher money balances

Question 48

The slope of the AD-curve will become steeper if

A)money demand becomes more income inelastic
B)money demand becomes more interest elastic
C)investment becomes more interest elastic
D)the income tax rate is decreased
E)none of the above

Question 49

The slope of the AD-curve will become flatter if

A)money demand becomes more income inelastic
B)money demand becomes more interest elastic
C)investment becomes more interest elastic
D)the marginal propensity to save increases
E)both A and C

Question 50

A decrease in the income tax rate will

A)decrease the fiscal policy multiplier
B)increase the slope of the IS-curve
C)decrease the monetary policy multiplier
D)decrease the slope of the AD-curve
E)both A and B