Deck 21: Is-Lm

Question 1

The in the equation for the components of aggregate demand should include state and local government spending.

Answer 1

True

Question 2

Interest rates are negatively related to I and NX.

Answer 2

True

Question 3

Milton Friedman was a major contributor to the formation of the IS-LM model.

Answer 3

False

Question 4

A decrease in the interest rate shifts the IS curve to the left.

Question 5

Aggregate demand is composed of consumption, investment, government spending and imports.

Question 6

The IS curve is the equilibrium pairs of output and the interest rate in the goods market.

Question 7

An increase in net exports shifts the aggregate demand function up.

Question 8

A decrease in taxes increases equilibrium output through its effect on consumption.

Question 9

If the marginal propensity to consume is 0.75, the multiplier is 4.

Question 10

The IS curve is upward sloping.

Question 11

When Sam buys stock in Ford, increases.

Question 12

If imports decrease, then equilibrium output falls.

Question 13

One reason investment is inversely related to the interest rate is that higher interest rates mean a higher cost of borrowing.

Question 14

If autonomous consumption falls, then the consumption function becomes steeper.

Question 15

The marginal propensity to consume is the slope of the consumption function.

Question 16

Income and disposable income are the same if taxes are zero.

Question 17

In the Keynesian cross model, if taxes rise the same amount as government spending, the equilibrium output falls.

Question 18

According to the Keynesian cross model, if the marginal propensity to consume is 0.9, and government spending rises by $200, then equilibrium output rises by $380.

Question 19

In the Keynesian cross model, if consumers save a larger portion of disposable income, equilibrium GDP rises.

Question 20

The LM curve is the equilibrium pairs of output and the interest rate in the goods market.

Question 21

Investment fell leading up to each recession in the United States in the 1900s.

Question 22

The consumption function shifts down if _____ fall(s).

A) taxes
B) autonomous consumption
C) government spending
D) none of the above

Question 23

If the marginal propensity to consume rises, then the consumption function on the Keynesian cross diagram

A) shifts up.
B) shifts down.
C) becomes flatter.
D) becomes steeper.

Question 24

An excess demand for money leads to an increase in interest rates for a given level of output.

Question 25

A high interest rate is associated with a strong currency, which leads to low net exports.

Question 26

Federal government expenditures are several times greater than state and local government expenditures in the United States.

Question 27

The price level is an exogenous variable in the IS-LM model.

Question 28

In the Keynesian cross model, equilibrium output rises if _____ rise(s).

A) government spending
B) the mpc
C) net exports
D) all of the above

Question 29

One reason investment is inversely related to the interest rate is that higher interest rates means government bonds are a less attractive investment.

Question 30

If government spending decreases, then output _____ by _____ than the change in spending.

A) increases, more
B) increases, less
C) decreases, more
D) decreases, less

Question 31

At a point to the right of the LM curve, there is an excess supply of money.

Question 32

If the marginal propensity to consume is 0.95 and government spending falls by $200, then equilibrium output on the Keynesian cross diagram (for a fixed interest rate) rises by

A) $180.
B) $200.
C) $380.
D) none of the above.

Question 33

The IS curve is the combination of output and the interest rate, where investment equals savings.

Question 34

If the marginal propensity to consume is 0.8, then the multiplier is

A) 0.2.
B) 1.2
C) 1.25
D) 5.0.

Question 35

Net exports is

A) imports minus exports.
B) exports minus inputs.
C) consumption minus exports.
D) exports minus consumption.

Question 36

In a country where investment is relatively insensitive to changes in the interest rate, the IS curve is steeper.

Question 37

At a point to the right of the IS curve, there is an excess supply of goods.

Question 38

The steeper the consumption function the higher the multiplier.

Question 39

The larger the effect of changes in output on money demand, the flatter the LM curve is.

Question 40

When taxes increase and all else stays constant, the IS curve

A) shifts to the left.
B) shifts to the right.
C) stays the same.
D) none of the above.

Question 41

If interest rates rise, which of the following would fall?

A) mpc
B) investment
C) imports
D) government spending

Question 42

If interest rates rise, which of the following would fall?

A) taxes
B) autonomous consumption
C) investment
D) all of the above

Question 43

Using the Keynesian cross, if autonomous consumption is $300 and investment is $200, and the marginal propensity to consume is 0.9, while government spending, net exports and taxes are zero, then equilibrium output is

A) $450.
B) $500.
C) $950.
C) $5,000.

Question 44

On the Keynesian cross diagram, an increase in which of the following would cause the aggregate demand function to shift up?

A) autonomous consumption
B) exports
C) investment
D) all of the above

Question 45

Points to the right of the LM curve show an excess

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

Question 46

If autonomous consumption is $200, disposable income is $1000 and the marginal propensity to consume is 0.9, then consumption is

A) $900.
B) $1,000.
C) $1100.
D) $1,200.

Question 47

Fiscal stimulus includes

A) government spending.
B) decreasing taxes.
C) both of the above.
D) none of the above

Question 48

If interest rates rise, which of the following would rise?

A) exports
B) imports
C) investment
D) all of the above

Question 49

During a financial panic, the LM curve

A) shifts left.
B) shifts right.
C) stays the same.
D) none of the above

Question 50

Using the Keynesian cross, if autonomous consumption is $200 and investment is $400, and the marginal propensity to consume is 0.75, while government spending, net exports and taxes are zero, then equilibrium output is

A) $450.
B) $600.
C) $1,050.
C) none of the above.

Question 51

Using the Keynesian cross, if autonomous consumption is $200, government spending and taxes are $300, investment is $100, net exports is $100, and the marginal propensity to consume is 0.5, find equilibrium output.

A) $600
B) $750
C) $1,400
D) none of the above

Question 52

If the mpc is 0.75, and government spending and taxes both rise by $100, then equilibrium output

A) falls by $100.
B) falls by $25.
C) rises by $25.
D) rises by $100.

Question 53

On the Keynesian cross diagram, a decrease in which of the following would cause the aggregate demand function to shift up?

A) autonomous consumption
B) taxes
C) investment
D) none of the above

Question 54

Using the Keynesian cross, if autonomous consumption is $100, government spending and taxes are $200, investment is $100, net exports are zero, and the marginal propensity to consume is 0.8, find equilibrium output.

A) $720
B) $1,000
C) $1,200
D) none of the above

Question 55

In the Keynesian cross model, if the government lowers taxes, then ___ rises.

A) consumption
B) disposable income
C) equilibrium output
D) all of the above

Question 56

If the interest rate rises, then _____ falls due to a(n) _____ of the exchange rate.

A) exports, appreciation
B) exports, depreciation
C) imports, appreciation
D) imports, depreciation

Question 57

If interest rates fall, which of the following would rise due to the impact on the exchange rate?

A) exports
B) imports
C) investment
D) all of the above

Question 58

The IS curve slopes down because as the interest rate rises

A) borrowing costs rise.
B) the net present value of business projects falls.
C) the domestic currency strengthens, dampening export demand.
D) all of the above.

Question 59

G in the aggregate demand equation represents

A) federal government spending.
B) state government spending.
C) local government spending.
D) all of the above.

Question 60

Points to the left of the IS curve show an excess __________.

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

Question 61

If government spending and taxes fall by the same amount, what would be the impact on equilibrium output in the Keynesian cross model? Explain in words.

Question 62

Draw a Keynesian cross diagram and show how an increase in government spending would affect equilibrium output.

Question 63

An increase in government spending $\Delta$ G that is paid for by an identical increase in taxes increases equilibrium output by $\Delta$ Gm regardless of the mpc. Prove.
The decrease in expenditure due to the tax increase is mpc x $\Delta$ G (some comes out of savings), so the total increase in expenditures is $\Delta$ G - mpc x $\Delta$ G = (1 - mpc) $\Delta$ G. The total change in equilibrium output is m(1 - mpc) $\Delta$ G where m is the multiplier, but m = 1/(1 - mpc) so the total change is $\Delta$ G.

Question 64

Using the Keynesian cross, if autonomous consumption is $400, government spending is $50, investment is $200, net exports and taxes are zero, and the marginal propensity to consume is 0.8, find equilibrium output.

Question 65

What does the multiplier measure?

Question 66

Explain the difference between a fiscal stimulus and a monetary stimulus.

Question 67

Which of the following is not an endogenous variable in the IS-LM model?

A) interest rate
B) price level
C) output
D) none of the above

Question 68

Using the Keynesian cross, if autonomous consumption is $500, government spending and taxes are $200, investment is $100, net exports are zero, and the marginal propensity to consume is 0.9, find equilibrium output.

Question 69

What are the four components of aggregate demand?

Question 70

Over the period 1990-2008, NX for the United States has been

A) positive.
B) negative.
C) both of the above.
D) neither of the above.

Question 71

If autonomous consumption is $50, disposable income is $500 and the marginal propensity to consume is 0.8, find C.

Question 72

"Fiscal stimulus" could be represented by an increase in _____ in the aggregate demand function.

A) C
B) I
C) G
D) NX

Question 73

What is the marginal propensity to consume?

Question 74

Draw a Keynesian cross diagram and show how a decrease in investment would affect equilibrium output.

Question 75

Country A is a closed economy so imports and exports are zero. Country B does trade but has no trade deficit (NX = 0) and is otherwise identical to Country A. What is the difference in the IS-LM graph for both countries?