Deck 11: The Money Market and the LM Curve

Question 1

The questions with which Chapter 11 is concerned include each of the following except

A) what do we mean by "money-market equilibrium"?
B) what is the LM - liquidity-money - curve?
C) how is the equilibrium level of real GDP determined when the money stock is constant?
D) how is the equilibrium level of potential GDP determined when the money stock is constant?

Answer 1

how is the equilibrium level of potential GDP determined when the money stock is constant?

Question 2

The questions with which Chapter 11 is concerned include each of the following except

A) what do we mean by "money-market equilibrium"?
B) what is the IS-LM framework?
C) what determines the level of potential output?
D) what is an LM shock to the economy?

Answer 2

what determines the level of potential output?

Question 3

The questions with which Chapter 11 is concerned include each of the following except

A) what is an IS shock to the economy?.
B) what is a supply shock?
C) what is an IS shock to the economy?
D) what is the aggregate demand - AD - curve?

Answer 3

what is a supply shock?

Question 4

The questions with which Chapter 11 is concerned include each of the following except

A) how are the determinants of the money supply different in a sticky-price than in a flexible-price model?
B) what is an aggregate demand - AD - curve?
C) how is the equilibrium level of real GDP determined when the money stock is constant?
D) what is the aggregate supply curve - AS - curve?

Question 5

The analysis of Chapter 10 is not complete because it lacks a theory as to how the

A) level of aggregate demand is determined.
B) real exchange rate is determined.
C) real interest rate is determined when the money stock is fixed.
D) short-term nominal interest rate is determined.

Question 6

The LM curve tells us how interest rates adjust

A) when the stock of liquid money is fixed.
B) when the level of real GDP is fixed.
C) when the stock market is fixed.
D) when the stock of wealth is fixed.

Question 7

Each of the following is a fact about household and business demand for money except

A) money demand is proportional to total nominal income.
B) money demand has a time trend, the result of slow changes in banking-sector structure and technology.
C) money demand is inversely related to the long-term real interest rate.
D) money demand is inversely related to the nominal interest rate.

Question 8

The opportunity cost of holding wealth in the form of money is

A) the real interest rate.
B) the expected rate of inflation.
C) the expected rate of growth in potential GDP.
D) the nominal interest rate.

Question 9

The real money demand curve is downward sloping because

A) real money demand is inversely related to total nominal income.
B) real money demand is inversely related to the short-term nominal interest rate.
C) real money demand is inversely related to a time trend.
D) real money demand is inversely related to the real money supply.

Question 10

The demand for money is __________ related to total income and _________ related to __________.

A) directly: inversely; the long-term real interest rate
B) directly; directly; the short-term nominal interest rate
C) inversely; directly; the short-term nominal interest rate
D) directly; inversely; the short-term nominal interest rate

Question 11

The demand-for-money function (M^d/P) is

A) M_yY + M_i i.
B) M_yY - M_i r.
C) M_yY - M_i i.
D) M_yY + M_i r.

Question 12

If there is excess money demand or money supply in the money market,

A) the short-term nominal interest rate will adjust to bring about equilibrium.
B) the price level will adjust to bring about equilibrium.
C) the supply of money will adjust to bring about equilibrium.
D) the money demand curve will shift to bring about equilibrium.

Question 13

If there is excess demand in the money market,

A) the supply of money will increase to meet the demand at the current short-term nominal interest rate.
B) the short-term nominal interest rate will decrease until the excess demand disappears.
C) the short-term nominal interest rate will increase until the excess demand disappears.
D) the money demand curve will shift to the left until the excess demand disappears.

Question 14

If there is excess supply in the money market,

A) the supply of money will decrease to meet the demand at the current short-term nominal interest rate.
B) the short-term nominal interest rate will decrease until the excess supply disappears.
C) the short-term nominal interest rate will increase until the excess supply disappears.
D) the money demand curve will shift to the right until the excess supply disappears.

Question 15

The real money supply curve is drawn as a vertical line in Chapter 11 because

A) the model assumes that the central bank is pegging the short-term nominal interest rate.
B) the model assumes that the central bank is pegging the demand for money.
C) the model assumes that the central bank is pegging the supply of money.
D) the model assumes that the central bank is pegging the potential output level.

Question 16

An increase in total income will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 17

A decrease in nominal income will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 18

An increase in the money supply will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 19

A decrease in the money supply will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 20

An increase in the price level will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 21

A decrease in the price level will

A) shift the money demand curve to the left, resulting in a decrease in the short-term nominal interest rate.
B) shift the money supply curve to the right, resulting in a decrease in the short-term nominal interest rate.
C) shift the money supply curve to the left, resulting in an increase in the short-term nominal interest rate.
D) shift the money demand curve to the right, resulting in an increase in the short-term nominal interest rate.

Question 22

The LM curve tells us

A) the combinations of total income and nominal interest rates that produce money market equilibrium.
B) the combinations of potential output and nominal interest rates that produce money market equilibrium.
C) the combinations of total income and real interest rates that produce money market equilibrium.
D) what the nominal interest rate will be for each value of savings.

Question 23

If the nominal money supply increases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the right.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more horizontal.

Question 24

If the nominal money supply decreases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 25

If the price level increases so that the real money supply decreases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 26

If the price level decreases so that the real money supply increases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the right.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more horizontal.

Question 27

If the baseline level of autonomous spending increases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase
D) the LM curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.

Question 28

If the baseline level of autonomous spending decreases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will increase
D) the LM curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will increase.

Question 29

If the level of government purchases increases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase
D) the LM curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.

Question 30

If the level of government purchases decreases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will increase
D) the LM curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will increase.

Question 31

If the nominal money supply increases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will decrease.
D) the LM curve will shift to the right and the equilibrium level of the real interest rate will decrease and . the equilibrium level of real GDP will increase.

Question 32

If the nominal money supply decreases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the left and the equilibrium level of the real interest rate will increase and theequilibrium level of real GDP will decrease.
D) the LM curve will shift to the left and the equilibrium level of the real interest rate will decrease and the equilibrium level of real GDP will increase.

Question 33

If the price level decreases so that the real money supply increases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the left and the equilibrium level of the real interest rate will increase and the equilibrium level of real GDP will decrease.
D) the LM curve will shift to the right and the equilibrium level of the real interest rate will decrease and the equilibrium level of real GDP will increase.

Question 34

If the price level increases so that the real money supply decreases,

A) the IS curve will shift to the right and the equilibrium levels of the real interest rate and real GDP will increase.
B) the IS curve will shift to the left and the equilibrium levels of the real interest rate and real GDP will decrease.
C) the LM curve will shift to the left and the equilibrium level of the real interest rate will increase and theequilibrium level of real GDP will decrease.
D) the LM curve will shift to the right and the equilibrium level of the real interest rate will decrease and the equilibrium level of real GDP will increase.

Question 35

Any change in the nominal money supply or the price level will

A) shift the LM curve location.
B) change the slope of the LM curve.
C) shift the IS curve location.
D) change the slope of the IS curve.

Question 36

If the expected inflation rate increases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 37

If the expected inflation rate decreases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the right.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more horizontal.

Question 38

If the risk premium increases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 39

If the risk premium decreases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 40

If the term premium increases,

A) the LM curve will shift to the left.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the slope of the LM curve will become more vertical.

Question 41

If the expected rate of inflation decreases, the risk premium increases, or the term premium increases,

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

Question 42

If the expected rate of inflation increases, the risk premium decreases, or the term premium decreases,

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

Question 43

Any change in the interest sensitivity of investment spending, of the interest sensitivity of the exchange rate, or the exchange rate sensitivity of exports

A) will shift the LM curve location.
B) will change the slope of the LM curve.
C) will shift the IS curve location.
D) will change the slope of the IS curve.

Question 44

Any change in the marginal propensity to expend

A) will shift the LM curve location.
B) will change the slope of the IS curve.
C) will shift the IS curve location.
D) will change the slope and shift the position of the IS curve

Question 45

Any change in the economic environment and economic policy that change the level of autonomous spending

A) will shift the LM curve location.
B) will change the slope of the LM curve.
C) will shift the IS curve location.
D) will change the slope of the IS curve.

Question 46

Each of the following is an international shock that will affect the IS-LM equilibrium except

A) changes in foreign real GDP.
B) changes in the foreign real interest rate.
C) changes in expectations of the foreign inflation rate.
D) changes in foreign exchange speculators' view about the fundamental value of the exchange rate.

Question 47

An increase in foreign real GDP will

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

Question 48

A decrease in foreign real GDP will

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

Question 49

A decrease in the foreign real interest rate will

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

Question 50

An increase in the foreign real interest rate will

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

Question 51

The curve that indicates that a decrease in the price level will increase the level of aggregate demand is called

A) the short-run aggregate supply curve.
B) the IS curve.
C) the aggregate demand curve.
D) the LM curve.

Question 52

The aggregate demand curve is downward sloping because an increase in the price level (with the nominal stock of money fixed) will

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

Question 53

Economists call the correlation between real GDP (relative to potential output) and the price level and rate of inflation (relative to their previously expected value)

A) the short-run aggregate supply curve.
B) the IS curve.
C) the aggregate demand curve.
D) the LM curve.

Question 54

Each of the following is a reason why a high level of real GDP should be associated with higher inflation and a higher price level except

A) when demand for products is higher than expected, firms raise their prices higher than they had previously planned.
B) when aggregate demand is higher than potential output, individual economic sectors and industries in . the economy quickly reach the limits of capacity.
C) high demand for labor gives workers more bargaining power, which they use to bargain for higher wages.
D) high demand for money raises the exchange rate.

Question 55

An increase in the money supply will shift the LM curve to the _______ and the ________

A) right; AS curve to the left.
B) right; AD curve to the right.
C) left; AD curve to the right.
D) left; AD curve to the left.

Question 56

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-The equilibrium real interest rate would be

A) 6.8%.
B) 5.2%.
C) 2.7%.
D) 4.4%.

Question 57

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-The equilibrium level of real GDP would be

A) $8300 billion.
B) $8700 billion.
C) $6217 billion.
D) $5933 billion.

Question 58

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-The equilibrium nominal interest rate would be

A) 8.8%.
B) 7.2%.
C) 4.7%.
D) 6.4%.

Question 59

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the baseline investment level increases by $200 billion. The new equilibrium level of the real interest rate would be

A) 5.6%
B) 3%.
C) 7.2%.
D) 4.7%.

Question 60

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the baseline investment level increases by $200 billion. The new equilibrium level of national income would be

A) $6217 billion.
B) $6500 billion.
C) $9100 billion.
D) $8700 billion.

Question 61

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the baseline investment level increases by $200 billion. The new equilibrium level of the nominal interest rate would be

A) 7.6%
B) 5%.
C) 9.2%.
D) 6.7%.

Question 62

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the central bank increases the nominal money supply so that the new LM curve is Y=$3000 + $1000 x (r + ). The new equilibrium real interest rate would be

A) 5.6%.
B) 3.4%.
C) 1.7%.
D) 4%.

Question 63

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the central bank increases the nominal money supply so that the new LM curve is Y=$3000 + $1000 x (r + ). The new equilibrium level of national income would be

A) $9150 billion.
B) $9575 billion.
C) $9000 billion.
D) $8600 billion.

Question 64

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )

-Suppose that the central bank increases the nominal money supply so that the new LM curve is Y=$3000 + $1000 x (r + ). The new equilibrium level of the nominal interest rate would be

A) 7.6%.
B) 5.4%.
C) 3.7%.
D) 6%.