Deck 11: The Is Curve

Question 1

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

Answer 1

investment; savings

Question 2

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

A)
B)
C)
D)
E)

Answer 2

Question 3

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

Answer 3

potential output; smoother

Question 4

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 5

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 6

Refer to the following table when answering the following questions.
Table 11.1: Real Growth Rates: 1970-2015

-You are given the data in Table 11.1, which covers the period 1970-2015. "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.

Question 7

In the short run, because financial markets do not respond immediately to interest rate changes:

A) prices are 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 8

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 9

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) ; current account

Question 10

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) the output gap is zero.

Question 11

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

A)
B)
C)
D)
E)

Question 12

In the equation , if
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 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 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 15

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 16

Every six to eight weeks, or so, the Federal Reserve meets to set the ________ rate.

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

Question 17

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

A)
B)
C)
D)
E)

Question 18

In the long run, the:

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

Question 19

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 20

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 21

Refer to the following figure when answering the following question.
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 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 22

Refer to the following figure when answering the following questions.
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 23

In the IS curve is equal to:

A) one.
B) .
C) .
D) .
E) zero.

Question 24

Refer to the following table when answering the following questions.
Table 11.1: Real Growth Rates: 1970-2015

-You are given the data in Table 11.1, which covers the period 1970-2015. "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 25

Refer to the following figure when answering the following questions.
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 26

In the equation , the left-hand side is called:

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

Question 27

Using the IS curve , in the long run,
________ 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 28

Consider the following model of the IS curve without an international sector:
Consumption:
;
Investment:
; and
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 29

Using the IS curve , in the long run,
________ and ________, so that the economy is ________.

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

Question 30

In the equation , the term
Is ________ and
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 31

Refer to the following figure when answering the following questions.
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 32

Refer to the following figure when answering the following questions.
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 33

Refer to the following figure when answering the following questions.
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 34

Refer to the following figure when answering the following questions.
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 35

Refer to the following figure when answering the following questions.
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 36

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 37

In the IS curve, represents:

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

Question 38

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

A)
B)
C)
D)
E)

Question 39

Suppose ,
,
,
, and
) For any given
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 40

Suppose ,
,
,
, and
) For any given
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 41

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 42

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 43

Refer to the following figure when answering the following questions.
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 moves from point ________ to point ________.

A) b; a
B) d; a
C) d; c
D) c; d
E) d; b

Question 44

During the 2000s, Americans dramatically increased their personal debt. This is an example of a:

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

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

Refer to the following figure when answering the following questions.
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 moves from point ________ to point ________.

A) b; a
B) d; a
C) d; b
D) a; d
E) d; c

Question 47

Suppose we assume , and the real interest rate falls to
) 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 48

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 49

Suppose we assume , and the real interest rate rises to
) 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 the following questions.
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 point:

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

Question 51

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 52

Refer to the following figure when answering the following questions.
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 point:

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

Question 53

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 54

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 55

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 56

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 57

Refer to the following figure when answering the following questions.
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 58

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
) 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 59

Refer to the following figure when answering the following questions.
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 point:

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

Question 60

Suppose ,
,
,
, and
) For any given
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 61

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 62

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 63

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 64

Consider the following model of the IS curve without an international sector:
Consumption:
;
Investment:
And
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 65

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 66

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 67

________ provided a "natural experiment" for the permanent-income and life-cycle hypotheses, which used to provide an annual ________.

A) Texas; state income tax refund
B) Arkansas; lump sum Social Security payment
C) Nevada; credit to families' income taxes
D) New Hampshire; one-month utility payment
E) Alaska; permanent fund check

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

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) change in the real interest rate has a smaller impact on short-run fluctuations than with the standard IS curve.
C) demand shock has a smaller impact on short-run fluctuations than with the standard IS curve.
D) change in taxes has no impact on short-run output.
E) change in the marginal product of capital has a smaller effect on short-run fluctuations in output than with the standard IS curve.

Question 70

If we write the consumption function as , if

, the IS curve is given by:

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

Question 71

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 72

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 is correct.

Question 73

Consider the IS curve . If there is no demand shock and
And
, 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 74

Relatively recently, Toyota took over the position of the world's largest automobile manufacturer from General Motors (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 75

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 76

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.

Question 77

Refer to the following figure when answering the following questions.
Figure 11.7: Life Cycle Hypothesis
Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________ is/are (a) period(s) of ________, and area(s) ________ is/are (a) period(s) 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 78

The life-cycle hypothesis suggests that people base their consumption on their ________ incomes.

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

Question 79

Refer to the following figure when answering the following questions.
Figure 11.7: Life Cycle Hypothesis
Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________ is/are (a) period(s) of ________, and area(s) ________ is/are (a) period(s) 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 is correct.

Question 80

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