Deck 11: The Is Curve

Question 1

In the short run,because financial markets respond immediately to interest rate changes,

A)prices are very volatile.
B)the marginal product of capital always is greater than the real interest rate.
C)the marginal product of capital never deviates to the real interest rate.
D)the marginal product of capital deviates to the real interest rate.
E)investment is less volatile than output.

Answer 1

D

Question 2

Which of the following describes the investment function in the IS curve?

A)
B)
C)
D)
E)

Answer 2

B

Question 3

The foundation of the IS curve is the equation __________,which is the __________.

A) ;national income identity
B) ;national income identity
C) ;national income identity
D) ;current account
E)a and b are correct.

Answer 3

E

Question 4

In the long run,if the marginal product of capital equals the real interest rate,investment is given by:

A) .
B) .
C) .
D) .
E) .

Question 5

In the long run,

A)the federal funds rate equals the 10-year bond rate.
B)the marginal product of capital is greater than the real interest rate.
C)the marginal product of capital equals the nominal interest rate.
D)the marginal product of capital equals the real interest rate.
E)the marginal product of capital is less than the real interest rate.

Question 6

In the IS curve,consumption is represented as a constant fraction of __________,and,therefore,is __________ than current output.

A)potential output;more volatile
B)potential output;smoother
C)short-run fluctuations;smoother
D)short-run fluctuations;more volatile
E)none of the above

Question 7

According to the IS curve,when interest rates rise,__________ and __________.

A)governments borrow less;firms produce less
B)firms and households borrow more;firms produce less
C)firms and households borrow less;firms produce less
D)firms and households borrow more;firms produce more
E)firms and households borrow more;governments produce more

Question 8

In the short run,if the Federal Reserve reduces interest rates,

A)firms do not change their capital stock.
B)firms buy less capital and the marginal product of capital falls.
C)firms allow their capital to fully depreciate.
D)firms accumulate more inventory.
E)firms buy more capital and the marginal product of capital falls.

Question 9

The IS curve describes short-run movements in an economy via which of the following?

A)
B)
C)
D)
E)

Question 10

Which of the following describes the consumption function in the IS curve?

A)
B)
C)
D)
E)

Question 11

In the IS curve,consumption,government expenditure,exports,and imports are a function of:

A)expectations.
B)current output.
C)potential output.
D)the interest rate.
E)output fluctuations.

Question 12

In the equation
,if b± is close to zero,

A)investment is not very sensitive to real interest rate changes.
B)investment is not very sensitive to changes in the marginal product of capital.
C)investment is very sensitive to real interest rate changes.
D)investment is sensitive to tax rate changes.
E)a and b are correct.

Question 13

The IS curve describes the __________ relationship between __________ and __________.

A)negative;tax rate;investment
B)positive;interest rate;output
C)positive;tax rate;government expenditure
D)negative;interest rate;output
E)negative;interest rate;money supply

Question 14

In the equation
,if
Is close to infinity,

A)investment is extremely sensitive to real interest rate changes.
B)investment is somewhat sensitive to changes in the marginal product of capital.
C)investment is not very sensitive to real interest rate changes.
D)investment is sensitive to tax rate changes.
E)none of the above

Question 15

You are given the data in Table 11.1,which covers the period 1947-2006."Mean" is the average growth over the period and "St Dev" is the standard deviation of the growth (a measure of volatility)of real output,consumption,investment,government expenditure,and net exports.From this information,you conclude that

A)households smooth their consumption more than other sectors.
B)firms base their decisions on more than the potential GDP.
C)foreigners are fickle consumers.
D)government expenditures are zero.
E)a and b are correct.

Question 16

If the real interest rate is less than the marginal product of capital,firms are better off:

A)producing at a loss.
B)saving their earnings in an economywide financial market.
C)accumulating more inventory.
D)borrowing in financial markets and buying more capital.
E)none of the above

Question 17

The I in the IS curve stands for __________ and S denotes __________.

A)investment;sales
B)interest rate;savings
C)investment;savings
D)inventory;sales
E)interest rate;sales

Question 18

In the simple IS curve analysis,which of the following includes both the real interest rate and the potential output?

A)exports
B)consumption
C)government expenditures
D)investment
E)imports

Question 19

Every six weeks,or so,the Federal Reserve meets to set the __________.

A)discount rate
B)mortgage rate
C)federal funds rate
D)10-year bond rate
E)tax rate

Question 20

In the equation
,if
Equals zero,

A)investment is sensitive to tax rate changes.
B)investment is extremely sensitive to changes in the marginal product of capital.
C)investment is not very sensitive to real interest rate changes.
D)investment is insensitive to real interest rate changes.
E)investment equals 0.

Question 21

In the equation (Y - T - C)+ (T - G)+ (IM - EX)= I,the left-hand side is called:

A)investment.
B)private saving.
C)total saving.
D)government debt.
E)public saving.

Question 22

Using the IS curve
,in the long run,
__________ and __________,so that __________.

A)equals one; ;the economy is in recession
B)is greater than one; ;the economy is at its long-run equilibrium
C)equals zero; ;the economy is at its long-run equilibrium
D)equals one; ;the economy is expanding
E)equals one; ;the economy is in recession

Question 23

Using the IS curve
,in the long run,a¯ __________ and __________,so that
__________.

A)equals one; ;equals zero
B)is greater than one; ;is greater than zero
C)equals zero; ;equals zero
D)equals one; ;equals zero
E)equals one; ;equals one

Question 24

Consider Figure 11.2.If investment is interest rate insensitive,the economy would be characterized by __________.

A)
B)
C)
D)
E)Not enough information is given.

Question 25

In the IS curve,
,a¯ is equal to:

A)1.
B) .
C) .
D) .
E)Not enough information is given.

Question 26

Over the past few years,the Chinese have bought billions of dollars of U.S.bonds,pushing down U.S.interest rates.From this,you conclude that:

A)short-run output will rise along the IS curve,possibly pushing the economy toward expansion.
B)short-run output will fall along the IS curve,possibly pushing the economy toward recession.
C)short-run output will fall as the IS curve shifts left,possibly pushing the economy toward recession.
D)the federal government will lower taxes.
E)there will be no change in short-run output.

Question 27

You hear that the Federal Reserve is raising interest rates.From this new information,you conclude that

A)short-run output will fall along the IS curve,possibly pushing the economy toward recession.
B)short-run output will rise along the IS curve,possibly pushing the economy toward expansion.
C)short-run output will fall as the IS curve shifts left,possibly pushing the economy toward recession.
D)the federal government will lower taxes.
E)there will be no change in short-run output.

Question 28

In the IS curve,
T represents

A)potential output.
B)total real output.
C)short-run fluctuations in output.
D)the real interest rate.
E)none of the above

Question 29

In the IS curve,
Is given by __________,where
Is current output and
Is potential output.

A)
B)
C)
D)
E)

Question 30

In the IS curve
,the term
Is called:

A)the tax rate.
B)the elasticity of output with respect to the interest rate.
C)a consumption expenditure shock.
D)the deviation of the real interest rate to the marginal product of capital.
E)an aggregate demand shock.

Question 31

Suppose
,
,
,
,and a¯im = 0.20.For any given
,
Equals __________ and the economy __________.

A)0.00;is in its long-run equilibrium
B)1.05;has experienced a positive aggregate demand shock
C)0.45;has experienced a positive aggregate demand shock
D)-0.15;has experienced a negative aggregate demand shock
E)0.05;has experienced a positive aggregate demand shock

Question 32

Consider Figure 11.1,which shows the growth rate of real investment and the real GDP.How does the investment function describe why investment is more volatile than the real GDP?

A)Firms are unpredictable.
B)differences in expectations across firms
C)differences in expenditure shares.
D)the inclusion of interest rates in the investment function
E)none of the above

Question 33

Suppose
,
,
,
,and
)For any given
,
Equals __________ and the economy __________.

A)0.00;is in its long-run equilibrium
B)0.05;has experienced a positive aggregate demand shock
C)1.05;has experienced a positive aggregate demand shock
D)0.45;has experienced a positive aggregate demand shock
E)-0.15;has experienced a negative aggregate demand shock

Question 34

Suppose we assume
,
,
,and the real interest rate rises to
)The economy would

A)remain at its long-run equilibrium.
B)move from 1 percent below its potential to its longrun equilibrium.
C)move from its long-run equilibrium to 1 percent above its potential.
D)move from its long-run equilibrium to 1 percent below its potential.
E)none of the above

Question 35

In the equation (Y - T - C)+ (T - G)+ (IM - EX)= I,the term (Y - T - C)is __________ and (T - G)is __________.

A)aggregate saving;tax revenues
B)private saving;government saving
C)foreign saving;private saving
D)the government debt;investment
E)the trade balance;the financial account

Question 36

Consider Figure 11.2.If investment is infinitely interest rate sensitive,the economy would be characterized by __________.

A)
B)
C)
D)
E)Not enough information is given.

Question 37

Consider Figure 11.2.If investment is interest rate sensitive,the economy would be best characterized by __________.

A)
B)
C)
D)
E)Not enough information is given.

Question 38

Suppose we assume
,
,
,and the real interest rate falls to
)The economy would:

A)remain at its long-run equilibrium.
B)move from its long-run equilibrium to 1 percent below its potential.
C)move from 1 percent below its potential to its longrun equilibrium.
D)move from its long-run equilibrium to 1 percent above its potential.
E)none of the above

Question 39

Consider the following model of the IS curve without an international sector:
Consumption:
Investment:
Government expenditure:
With this formulation the IS curve is:

A)horizontal.
B)less steeply sloped than the "standard" IS curve.
C)vertical.
D)more steeply sloped than the "standard" IS curve.
E)Not enough information is given.

Question 40

Suppose
,
,
,
,and
)For any given
,
Equals __________ and the economy __________.

A)0.00;is in its long-run equilibrium
B)0.90;has experienced a positive aggregate demand shock
C)0.30;has experienced a positive aggregate demand shock
D)-0.10;has experienced a negative aggregate demand shock
E)1.00;is in its long-run equilibrium

Question 41

If there is an aggregate demand shock,

A)the IS curve shifts to the right.
B)the IS curve shifts to the left.
C)there is rightward movement along the IS curve.
D)there is leftward movement along the IS curve.
E)Not enough information is given.

Question 42

If all the economies of the European Union experience a recession,the United States experiences __________ and the IS curve __________.

A)no change;stays constant
B)a positive aggregate demand shock;shifts right
C)a negative aggregate demand shock;shifts left
D)no change;shifts right
E)Not enough information is given.

Question 43

Suppose we assume that initially
,
,
;if
Rises 2 percent and the real interest rate falls 4 percent,short-run output:

A)rises 2 percent.
B)rises 6 percent.
C)falls 2 percent.
D)rises 4 percent.
E)does not change.

Question 44

Which of the following is (are)not an example(s)of an aggregate demand shock?
I)a change in interest rates
Ii)a change in tax policy
Iii)a natural disaster
Iv)a change in the price of oil

A)i
B)ii
C)iii
D)iv
E)i and iv

Question 45

Which of the following is (are)an example(s)of an aggregate demand shock?
I)a change in interest rates
Ii)a change in tax policy
Iii)a natural disaster
Iv)a change in the price of oil

A)i
B)ii
C)iii
D)iv
E)ii and iii

Question 46

In the late 1990s,the United States experienced a significant productivity shock that raised the marginal product capital.This would have caused:

A)a shift in the aggregate supply curve.
B)a leftward movement along the IS curve.
C)a rightward shift of the IS curve.
D)a rightward movement along the IS curve.
E)no change in the IS curve.

Question 47

Suppose we assume that initially
,
,
;if
Rises 2 percent and the real interest rate rises 2 percent,short-run output:

A)rises 2 percent.
B)rises 1 percent.
C)falls 2 percent.
D)rises 4 percent.
E)does not change.

Question 48

The Life Cycle hypothesis suggests that people base their consumption on their:

A)current income.
B)average lifetime incomes rather than their current income.
C)temporary income.
D)future income.
E)past income.

Question 49

Recently,Toyota took over the position of the world's largest automobile manufacturer from GM.This is an example of __________ in the United States.

A)a positive aggregate demand shock
B)a negative aggregate demand shock
C)a rightward movement along the IS curve
D)a positive aggregate supply shock
E)Not enough information is given.

Question 50

Consider Figure 11.6 of the Life Cycle hypothesis.Area(s)__________ are periods of __________,and area(s)__________ are periods of __________.

A)A;borrowing;B;dissaving
B)A;saving;B;borrowing
C)B;dissaving;A and C;borrowing
D)A and C;dissaving;B;borrowing
E)a and b are correct.

Question 51

Consider two economies with the following IS curves,denoted 1 and 2:
IS1:
IS2:
Given these two curves,the economies are identical except that they respond to interest rate changes differently.Suppose we assume
,b±1 = 1,
,
)If the real interest rate in each economy falls to
,then:

A)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.
B)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to -0.5 percent below its potential.
C)Country 1 will move from its long-run equilibrium to -1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.
D)Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential.
E)Neither country will move away from its long-run equilibrium.

Question 52

The Permanent Income hypothesis suggests that people will base their consumption on their:

A)permanent income only.
B)temporary income more than their permanent income.
C)permanent income more than their temporary income.
D)temporary income only.
E)future income.

Question 53

According to the Life Cycle and Permanent Income hypotheses,if future income rises permanently,current consumption:

A)falls.
B)rises.
C)does not change.
D)changes in proportion to interest rate changes.
E)Not enough information is given.

Question 54

An increase in consumer expenditures during the holiday season,a decrease in purchases of U.S.goods by foreigners,a tax increase,and a decline in new home starts are examples of a(n):

A)monetary policy.
B)aggregate supply shock.
C)aggregate demand shock.
D)expectations.
E)None of the above.

Question 55

The fundamental lesson of the Life Cycle and Permanent Income hypotheses is that:

A)individuals smooth their consumption patterns over their lifetime.
B)individuals vary their consumption patterns over their lifetime.
C)individuals' consumption patterns vary as their income changes.
D)individuals' consumption changes with changes in their temporary income.
E)taxes are ineffectual.

Question 56

Consider the following model of the IS curve without an international sector:
Consumption:
;
Investment:
;
Government expenditure:
)
With this formulation,the IS curve is:

A)horizontal.
B)vertical.
C)less steeply sloped than the "standard" IS curve.
D)more steeply sloped than the "standard" IS curve.
E)Not enough information is given.

Question 57

Consider Figure 11.6 of the Life Cycle hypothesis.Area(s)__________ are periods of __________,and area(s)__________ are periods of __________.

A)A;dissaving;C;saving
B)C;dissaving;B;saving
C)B;dissaving;A and C;saving
D)A and C;dissaving;B;saving
E)Not enough information is given.

Question 58

Suppose we assume that initially
,
,
;if
Rises 2 percent and the real interest rate falls 2 percent,short-run output:

A)falls 2 percent.
B)rises 1 percent.
C)rises 3 percent.
D)falls 1 percent.
E)does not change.

Question 59

Consider Figure 11.6 of the Life Cycle hypothesis.Area(s)__________ are periods of __________,and area(s)__________ are periods of __________.

A)A;borrowing;C;dissaving
B)A;borrowing;B;saving
C)B;dissaving;A and C;saving
D)A and C;dissaving;B;saving
E)a and b are correct.

Question 60

Recently,Americans have been increasing their debt.This is an example of:

A)a negative aggregate demand shock.
B)a positive aggregate demand shock.
C)a rightward movement along the IS curve.
D)a positive aggregate supply shock.
E)Not enough information is given.

Question 61

Government spending designed to mitigate short-run fluctuations is called:

A)discretionary spending.
B)fiscal policy.
C)monetary policy.
D)automatic stabilization.
E)a and b are correct.

Question 62

The basic IS model embodies the Life Cycle and Permanent Income hypotheses by:

A)setting consumption proportional to potential output.
B)keeping consumption growth constant.
C)setting consumption proportional to the real interest rate.
D)setting consumption equal to past income.
E)a and b are correct.

Question 63

The foundation of the IS curve is the national income identity given by the equation
.

Question 64

Consider the consumption function
)If
,a 2 percent demand shock:

A)raises short-run output by 1 percent.
B)raises short-run output by 0.5 percent.
C)raises short-run output by 4 percent.
D)reduces short-run output by 4 percent.
E)has no impact on short-run output.

Question 65

The I in the IS curve stands for investment and the S denotes saving.

Question 66

According to Ricardian equivalence,an increase in government expenditure without a proportional tax increase implies that households:

A)expect future tax increases and will reduce spending today.
B)expect higher current income and will increase spending today.
C)expect future tax decreases and will reduce spending today.
D)expect their income to remain constant and will hold spending constant.
E)do not change their spending patterns.

Question 67

When the real interest rate rises,there is leftward movement along the IS curve.

Question 68

Consider the IS curve
If there is no demand shock and
And
,a 1 percent increase in the real interest rate causes shortrun output to:

A)fall by 2 percent.
B)rise by 4 percent.
C)fall by 4 percent.
D)fall by 0.5 percent.
E)Not enough information is given.

Question 69

If a firm borrows a large sum of money,it may engage in particularly risky investments knowing that,if the investments succeed,the firm will make lots of money,while if the investments fail,the firm can declare bankruptcy.This is an example of:

A)risk taking.
B)adverse selection.
C)poor decision making.
D)Ricardian equivalency.
E)moral hazard.

Question 70

In the long run,the marginal product of capital is greater than the real interest rate.

Question 71

U.S.government spending on goods and services:

A)can act as a temporary shock that causes short-run fluctuations.
B)can act as a policy instrument designed to mitigate short-run fluctuations.
C)represents about 20 percent of the U.S.GDP.
D)All of the above are correct.
E)None of the above is correct.

Question 72

Agency problems occur when:

A)there is no information.
B)both parties have identical information.
C)both parties have limited information.
D)one party in a transaction has information that the other party does not possess.
E)None of the above is correct.

Question 73

The investment function is proportional to potential output only.

Question 74

In the long run,
and
.

Question 75

If we write the consumption function as
,if
,the IS curve is given by:

A)
B)
C)
D)
E)

Question 76

A key assumption of Ricardian equivalence is:

A)the Permanent Income hypothesis.
B)the Life Cycle hypothesis.
C)adaptive expectations.
D)independent monetary policy.
E)none of the above

Question 77

When the multiplier is included in the IS curve,

A)a demand shock has a larger impact on short-run fluctuations than with the standard IS curve.
B)a change in the real interest rate has a larger impact on short-run fluctuations than with the standard IS curve.
C)a demand shock has a smaller impact on short-run fluctuations than with the standard IS curve.
D)a change in taxes has no impact on short-run output.
E)a and b are correct.

Question 78

The implication of Ricardian equivalence is that,if the government increases expenditures without increasing taxes,the increase in government expenditures will be:

A)at least partially offset by a reduction in consumer spending.
B)enhanced by an increase in consumer spending.
C)more than offset by a reduction in firm spending.
D)enhanced by the multiplier effect.
E)none of the above

Question 79

If the government gives firms a temporary investment tax credit,

A)firms will invest now rather than in the future.
B)it will increase .
C)it will increase .
D)All of the above are correct.
E)None of the above is correct.

Question 80

When the multiplier is included in the IS curve,

A)a demand shock has a larger impact on short-run fluctuations than with the standard IS curve.
B)it has no impact on potential output.
C)a demand shock has a smaller impact on short-run fluctuations than with the standard IS curve.
D)a change in taxes has no impact on short-run output.
E)a and b are correct.