Deck 11: The Is Curve

Question 1

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

Answer 1

D

Question 2

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

Answer 2

D

Question 3

Refer to the following table when answering
Table 11.1: Real Growth Rates: 1950-2012
$$\begin{array} { l c c } \hline & \text { Mean } & \text { St Dev } \\\hline \text { Output } & 3.26 & 2.71 \\\text { Household Consumption } & 3.37 & 2.15 \\\text { Firm Investment } & 4.60 & 12.72 \\\text { Government Expenditures } & 2.76 & 6.15 \\\hline\end{array}$$

-You are given the data in Table 11.1, which covers the period 1950-2012. "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, and government expenditures. From this information, you conclude that:

A) households smooth their consumption more than other sectors
B) firms do not base their decisions on more than the potential GDP
C) foreigners are fickle consumers
D) government expenditures are zero
E) government expenditures are constant

Answer 3

households smooth their consumption more than other sectors

Question 4

Every six to eight 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 5

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 6

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

A) $I _ { t } = a _ { i } \tilde { Y } _ { t }$
B) $I _ { t } / \bar { Y } _ { t } = \bar { a } _ { t } - \bar { b } \left( R _ { t } - \bar { r } \right)$
C) $I _ { t } = a _ { i } \tilde { Y } _ { t } - \bar { b } R _ { t }$
D) $I _ { t } = \bar { a } _ { i }$
E) $I _ { t } = \bar { a } _ { i } \bar { Y } _ { t }$

Question 7

In the equation $I _ { t } / \tilde { Y } _ { t } = \bar { a } _ { i } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , if $\bar { b }$
Is close to zero, investment:

A) is not very sensitive to real interest rate changes
B) is very sensitive to changes in the marginal product of capital
C) is very sensitive to real interest rate changes
D) is sensitive to tax rate changes
E) does not depend upon the real interest rate

Question 8

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

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

Question 9

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

A) $I _ { t } = \bar { a } _ { i }$
B) $I _ { t } = \bar { a } _ { i } Y _ { t }$
C) $I _ { t } = \bar { a } _ { i } \bar { Y } _ { t }$
D) $l _ { t } = \tilde { Y } _ { t } / \bar { a } _ { i }$
E) $I _ { t } = \left[ \bar { a } _ { i } - \bar { b } \left( R _ { t } - \bar { r } \right) \right] \tilde { Y } _ { t }$

Question 10

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) using more imported intermediate goods

Question 11

In the equation $I _ { t } / \tilde { Y } _ { t } = \bar { a } _ { i } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , if $\bar { b }$
Equals zero, investment:

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

Question 12

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 13

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) the interest rate differential; smoother

Question 14

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

A) $C _ { t } = \bar { a } _ { c }$
B) $C _ { t } = \bar { a } _ { c } \bar { Y } _ { t } + \bar { b } R _ { t }$
C) $C _ { t } = \bar { a } _ { c } \tilde { Y } _ { t } - \bar { b } R _ { t }$
D) $C _ { t } = \bar { a } _ { c } \bar { Y } _ { t }$
E) $C _ { t } = \bar { a } _ { c } \tilde { Y } _ { t }$

Question 15

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

A) $Y _ { t } = C _ { t } + I _ { t } + G _ { t } + E X _ { t } - L M _ { t }$ ; national income identity
B) $Y _ { t } = C _ { t } + I _ { t } + G _ { t } + L M _ { t }$ ; national income identity
C) $Y _ { t } = C _ { t } + I _ { t } + G _ { t }$ ; national income identity
D) $Y _ { t } = C _ { t } + I _ { t } + G _ { t } + E X _ { t } - L M _ { t }$ ; current account
E) $Y _ { t } = C _ { t } + I _ { t } + G _ { t } + L M _ { t } - E X _ { t }$ ; current account

Question 16

In the equation $I _ { t } / \tilde { Y } _ { t } = \bar { a } _ { i } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , if $\bar { b }$
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) the output gap is zero

Question 17

In the short run, because financial markets do not 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 from the real interest rate
E) investment is less volatile than output

Question 18

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 19

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

A) $\uparrow \text { Interestrate } \Rightarrow \uparrow \text { Investment } \Rightarrow \downarrow \text { Output }$
B) $\uparrow \text { Interestrate } \Rightarrow \downarrow \text { Investment } \Rightarrow \downarrow \text { Output }$
C) $\text { } \uparrow \text { Tax rate } \Rightarrow \downarrow \text { Consumption } \Rightarrow \downarrow \text { Output }$
D) $\uparrow \text { Interestrate } \Rightarrow \uparrow \text { Investment } \Rightarrow \uparrow \text { Output }$
E) $\uparrow \text { Taxrate } \Rightarrow \uparrow \text { Governmentexpenditure } \Rightarrow \uparrow \text { Output }$

Question 20

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 21

Refer to the following table when answering
Table 11.1: Real Growth Rates: 1950-2012
$$\begin{array} { l c c } \hline & \text { Mean } & \text { St Dev } \\\hline \text { Output } & 3.26 & 2.71 \\\text { Household Consumption } & 3.37 & 2.15 \\\text { Firm Investment } & 4.60 & 12.72 \\\text { Government Expenditures } & 2.76 & 6.15 \\\hline\end{array}$$

-You are given the data in Table 11.1, which covers the period 1950-2012. "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, and government expenditures. From this information, you conclude that:

A) households base their consumption on permanent income
B) households do not consumption-smooth
C) firms rely solely on "animal spirits" when considering new investment
D) government expenditures are always greater than household expenditures
E) households base their consumption patterns on interest rates only

Question 22

Refer to the following figure when answering
Figure 11.4: IS Curve

-In Figure 11.4, the economy is in its long-run equilibrium at point:

A) b
B) a
C) c
D) d
E) Not enough information is given.

Question 23

Refer to the following figure when answering
Figure 11.2: Growth Rates of Investment and GDP (Source: U.S. Bureau of Economic Analysis)

-Consider Figure 11.2. How does the investment function describe why investment is more volatile than the real GDP?

A) unpredictable firms
B) differences in expectations across firms
C) differences in expenditure shares
D) the inclusion of interest rates in the investment function
E) changes in business taxes

Question 24

Refer to the following figure when answering
Figure 11.2: Growth Rates of Investment and GDP (Source: U.S. Bureau of Economic Analysis)

-Consider Figure 11.2. How does the investment function describe why investment is more volatile than the real GDP?

A) Firms are unpredictable.
B) Investment does not include household residential expenditures.
C) Inventories do not adjust to changes in business cycles.
D) Firms do not have very good information.
E) The marginal product of capital is included in the investment function.

Question 25

Consider the following model of the IS curve without an international sector:
Consumption: $C _ { t } = \bar { a } _ { c } \bar { Y } _ { t }$
Investment: $I _ { t } = \bar { a } _ { t } \bar { Y } _ { t }$
Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { Y } _ { t }$
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 26

Using the IS curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , in the long run, $\bar { a }$
________ and ________, so that ________.

A) equals one; $R _ { t } = \bar { r }$ ; the economy is in recession
B) is greater than one; $R _ { t } > \bar { r }$ ; the economy is at its long-run equilibrium
C) equals zero; $R _ { t } = \bar { r }$ ; the economy is at its long-run equilibrium
D) equals one; $\bar { b } = \bar { a }$ ; the economy is expanding
E) equals one; $R _ { t } = 1$ ; the economy is in recession

Question 27

In the IS curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , the term $\bar { a }$
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 28

Refer to the following figure when answering
Figure 11.3: IS Curve

-Consider Figure 11.3. If investment is interest rate sensitive, but not infinitely interest rate sensitive, the economy would be best characterized by:

A) IS₄
B) IS₂
C) IS₃
D) IS₁
E) Not enough information is given.

Question 29

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

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

Question 30

Refer to the following figure when answering
Figure 11.4: IS Curve

-In Figure 11.4, the economy deviates from its long-run equilibrium at point(s):

A) a
B) b
C) d
D) c
E) a, b, and d

Question 31

In the IS curve, $\tilde { Y } _ { t }$ represents:

A) potential output
B) total real output
C) short-run fluctuations in output
D) the real interest rate
E) None of these answers are correct.

Question 32

Using the IS curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , in the long run, $\bar { a }$
________ and ________, so that $\tilde { Y } _ { t }$
________.

A) equals one; $R _ { t } = \bar { r }$ ; equals zero
B) is greater than one; $R _ { t } > \bar { r }$ ; is greater than zero
C) equals zero; $R _ { t } = \bar { r }$ ; equals zero
D) equals one; $\bar { b } = \bar { a }$ ; equals zero
E) equals one; $R _ { t } = 1$ ; equals one

Question 33

In the IS curve, $\tilde { Y } _ { t }$ is given by ________, where $Y _ { t }$
Is current output and $\bar { Y } _ { t }$ Is potential output.

A) $Y _ { t } / \bar { Y } _ { t }$
B) $\left( Y _ { t } - \bar { Y } _ { t } \right) / \bar { Y } _ { t }$
C) $\left( \bar { Y } _ { t } - Y _ { t } \right) / \bar { Y } _ { t }$
D) $Y _ { t } - \bar { Y } _ { t }$
E) $Y _ { t } \times \bar { Y } _ { t }$

Question 34

In the IS curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) , \bar { a }$ is equal to:

A) one
B) $\bar { a } _ { c } + \bar { a } _ { i } + \bar { a } _ { g } + \bar { a } _ { e x } - \bar { a } _ { i m }$
C) $\bar { a } _ { c } + \bar { a } _ { i }$
D) $\bar { a } _ { c } + \bar { a } _ { i } + \bar { a } _ { g } + \bar { a } _ { e x } - \bar { a } _ { i m } - 1$
E) zero

Question 35

Refer to the following figure when answering
Figure 11.1: Growth rates of real investment and consumption (Source: U.S. Bureau of Economic Analysis)

-Consider Figure 11.1. What explains the difference in the volatility of each series?

A) Firms are predictable.
B) differences in expectations across firms
C) differences in expenditure shares
D) Firms do not make investment decisions based on interest rates.
E) Households consumption-smooth.

Question 36

Refer to the following figure when answering
Figure 11.1: Growth rates of real investment and consumption (Source: U.S. Bureau of Economic Analysis)

-Consider Figure 11.1. What explains the difference in the volatility of each series?

A) Firms adjust investment to fluctuations in the stock market.
B) Households base their consumption on permanent income.
C) differences in expenditure shares
D) Firms do not make investment decisions based on interest rates.
E) Households are very sensitive to interest rate changes.

Question 37

In the equation $( Y - T - C ) + ( T - G ) + ( \mathrm { IM } - \mathrm { EX } ) = L$ , 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 38

Suppose $\bar { a } _ { c } = 0.60$ , $\bar { a } _ { i } = 0.20$ , $\bar { a } _ { g } = 0.20$ , $\bar { a } _ { e x } = 0.10$ , and $\bar { a } _ { i m } = 0.20$ ) For any given $R _ { t } , \bar { a }$ Equals ________ and the economy ________.

A) 0; 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 39

Refer to the following figure when answering
Figure 11.3: IS Curve

-Consider Figure 11.3. If investment is infinitely interest rate sensitive, the economy would be characterized by:

A) IS₁
B) IS₃
C) IS₂
D) IS₄
E) Not enough information is given.

Question 40

Refer to the following figure when answering
Figure 11.3: IS Curve

-Consider Figure 11.3. If investment is interest rate insensitive, the economy would be characterized by:

A) IS₂
B) IS₃
C) IS₁
D) IS₄
E) Not enough information is given.

Question 41

Suppose we assume that initially $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%;$ if $\bar { a } _ { c }$
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 42

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 43

Refer to the following figure when answering
Figure 11.6: IS Curve

-Consider the IS curve in Figure 11.6. If the interest rate decreases and there is a negative aggregate demand shock, the economy will move to:

A) point b
B) point c
C) point d
D) point f
E) Not enough information is given.

Question 44

Suppose $\bar { a } _ { c } = 0.75$ , $\bar { a } _ { i } = 0.20$ , $\bar { a } _ { g } = 0.20$ , $\bar { a } _ { e x } = 0.10$ , and $\bar { a } _ { i m } = 0.20$ ) For any given $R _ { t } , \bar { a }$ Equals ________ and the economy ________.

A) 0; 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 45

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) a monetary policy
B) an aggregate supply shock
C) an aggregate demand shock
D) expectations
E) Ricardian equivalence

Question 46

Consider two economies with the following IS curves, denoted 1 and 2:
IS₁: $\tilde { Y } _ { 1 t } = \bar { a } - \bar { b } _ { 1 } \left( R _ { t } - \bar { r } \right)$
IS₂: $\tilde { Y } _ { 2 t } = \bar { a } - \bar { b } _ { 2 } \left( R _ { t } - \bar { r } \right)$
Given these two curves, the economies are identical except that they respond to interest rate changes differently. Suppose we assume $\bar { a } = 0 , \bar { b } _ { 1 } = 1 , \bar { b } _ { 2 } = 0.5 , R _ { t } = \bar { r } = 5 \%$ ) If the real interest rate in each economy falls to $R _ { t } ^ { \prime } = 4 \%$
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 47

Refer to the following figure when answering
Figure 11.5: IS Curve

-Consider Figure 11.5. If the economy initially is at its long-run equilibrium and the real interest rate decreases, the economy:

A) moves from point b to point a
B) moves from point d to point a
C) moves from point d to point c
D) moves from point c to point d
E) moves from point d to point b

Question 48

Refer to the following figure when answering
Figure 11.6: IS Curve

-Consider the IS curve in Figure 11.6. Holding the real interest rate constant, beginning at point e, if there is an aggregate demand shock:

A) the IS curve shifts right to point c
B) the IS curve shifts right to point a
C) the IS curve shifts left to point g
D) there is a movement along the IS curve to point d
E) Not enough information is given.

Question 49

Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$ , and the real interest rate rises to $R _ { t } ^ { \prime } = 6 \%$ ) In this scenario of the IS curve the economy would, in the short run:

A) remain at its long-run equilibrium
B) move from 1 percent below its potential to its long-run 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) have increased output

Question 50

Refer to the following figure when answering
Figure 11.6: IS Curve

-Consider the IS curve in Figure 11.6. If the interest rate increases and there is a positive aggregate demand shock, the economy would move from point e to:

A) point d
B) point c
C) point a
D) point b
E) point f

Question 51

Suppose we assume that initially $\bar { a } = 0 , \bar { b } = 0.5 , R _ { t } = \bar { r } = 5 \%;$ if $\bar { a } _ { c }$
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 52

Which of the following is an example of an IS 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 ii

Question 53

Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$ , and the real interest rate falls to $R _ { t } ^ { \prime } = 4 \%$ ) In this scenario of the IS curve the economy would, in the short run:

A) remain at its long-run equilibrium
B) have reduced output
C) move from 1 percent below its potential to its long-run equilibrium
D) move from its long-run equilibrium to 1 percent above its potential
E) move from its long-run equilibrium to 1 percent below its potential

Question 54

Suppose $\bar { a } _ { c } = 0.75$ , $\bar { a } _ { i } = 0.15$ , $\bar { a } _ { g } = 0.20$ , $\bar { a } _ { ex} = 0.10$ , and $\bar { a } _ { i m } = 0.20$ ) For any given $R _ { t } , \bar { a }$ Equals ________ and the economy ________.

A) 0; 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 55

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 56

Refer to the following figure when answering
Figure 11.5: IS Curve

-Consider Figure 11.5. If the economy initially is at its long-run equilibrium and the real interest rate increases, the economy:

A) moves from point b to point a
B) moves from point d to point a
C) moves from point d to point b
D) moves from point a to point d
E) moves from point d to point c

Question 57

Which of the following is NOT an example of an IS 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 iii

Question 58

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 59

Refer to the following figure when answering
Figure 11.6: IS Curve

-Consider the IS curve in Figure 11.6. If there is a positive aggregate demand shock and interest rates remain constant, the economy will move from point e to:

A) point a
B) point c
C) point d
D) point b
E) point f

Question 60

Suppose we assume that initially $\bar { a } = 0 , \bar { b } = 0.5 , R _ { t } = \bar { r } = 5 \%;$ if $\bar { a } _ { i m }$
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 61

Refer to the following figure when answering the next three questions.
Figure 11.7: Life Cycle Hypothesis
Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________ are periods of ________, and area(s) ________ are periods of ________.

A) A; borrowing; C; dissaving
B) A; borrowing; C; saving
C) B; dissaving; A and C; saving
D) A and C; dissaving; B; saving
E) A; saving; B; borrowing

Question 62

The life-cycle hypothesis suggests that people base their consumption on their:

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

Question 63

In the late 1970s, the United States experienced a productivity slowdown that decreased the marginal product capital. This caused:

A) a shift in the aggregate supply curve
B) a leftward shift of the IS curve
C) a decline in inflation expectations
D) a rightward movement along the IS curve
E) rising nominal interest rates

Question 64

Consider the following model of the IS curve without an international sector:
Consumption: $C _ { t} / \bar { Y } _ { t } = \bar { a } _ { c } - \bar { b } _ { c } \left( R _ { t } - \bar { r } \right)$ ; Investment: $I _ { t } / \bar { Y } _ { t } = \bar { a } _ { i } - \bar { b } _ { i } \left( R _ { t } - \bar { r } \right);$ Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { y } _ { t }.$ 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 65

Refer to the following figure when answering the next three questions.
Figure 11.7: Life Cycle Hypothesis
Consider Figure 11.7 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) None of these answers are correct.

Question 66

The basic IS model embodies the life-cycle and permanent-income hypotheses by:

A) setting consumption proportional to potential output
B) keeping consumption growth zero
C) setting consumption proportional to the real interest rate
D) setting consumption equal to past income
E) incorporating the interest rate

Question 67

The fundamental lesson of the life-cycle and permanent-income hypotheses is that:

A) individuals smooth their consumption patterns over their lifetimes
B) individuals vary their consumption patterns over their lifetimes
C) individuals' consumption patterns vary as their incomes change
D) individuals' consumption changes with changes in their temporary incomes
E) taxes are ineffectual

Question 68

In the late 1990s, the United States experienced a significant productivity shock that increased the marginal product capital. This 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 69

If we write the consumption function as $C _ { t } / \bar { Y } _ { t } = \bar { a } _ { c } + \bar { x } \tilde { Y } _ { t }$ , if $\bar { x } < 1$
, the IS curve is given by:

A) $\tilde { Y } _ { t } = \frac { 1 } { 1 - \bar { x } } \times \left[ \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) \right]$
B) $\tilde { Y } _ { t } = ( 1 - \bar { x } ) \times \left[ \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) \right]$
C) $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$
D) $\tilde { Y } _ { z } = \bar { x } \times \left[ \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) \right]$
E) $\tilde { Y } _ { t } = \frac { 1 } { \bar { x } } \times \left[ \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) \right]$

Question 70

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) None of these answers are correct.

Question 71

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 72

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 73

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 74

Consider the consumption function $C _ { t } / \bar { Y } _ { t } = \bar { a } _ { c } + \bar { x } \tilde { Y } _ { t }$ . If $\bar { x } = 0.5$
, 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 75

Refer to the following figure when answering the next three questions.
Figure 11.7: Life Cycle Hypothesis
Consider Figure 11.7 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 76

Consider the IS curve $\tilde { Y } _ { t } = \frac { 1 } { 1 - \bar { x } } \times \left[ \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right) \right]$ . If there is no demand shock and $\bar { b } = 2$ And $\bar { x } = 0.5$ , a 1 percent increase in the real interest rate causes short-run 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 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 smaller 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 change in the marginal product of capital has a smaller effect on short-run fluctuations in output than with the standard IS curve

Question 78

According to the permanent-income and life cycle hypotheses, if we wish to smooth consumption over our lifetimes we can:

A) get higher paying jobs
B) borrow and lend to ourselves over our lifetimes
C) set consumption proportional to the real interest rate
D) never change our spending patterns
E) always save 15 percent of our incomes

Question 79

During the 2000s, Americans dramatically increased their personal 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 80

The permanent-income hypothesis suggests that people will base their consumption on their:

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