Deck 9: The Is Curve

Question 1

An increase in the real interest rate will cause an increase in ________.

A)saving
B)planned investment
C)net exports
D)all of the above
E)none of the above

Answer 1

saving

Question 2

An decrease in the real interest rate will cause an increase in ________.

A)consumption
B)planned investment
C)net exports
D)all of the above
E)none of the above

Answer 2

all of the above

Question 3

When the U.S.real interest rate falls ________.

A)U.S.dollar assets earn a higher return relative to foreign assets
B)it makes U.S.exports more expensive in foreign currencies
C)imports will decrease
D)all of the above
E)none of the above

Answer 3

imports will decrease

Question 4

Total aggregate demand includes ________.

A)planned investment spending
B)consumption expenditures
C)net exports
D)all of the above
E)none of the above

Question 5

Actual expenditure is to planned expenditure as ________ is to ________.

A)desire;accomplishment
B)aggregate demand;aggregate supply
C)output;income
D)observed;theoretical
E)fluctuation;equilibrium

Question 6

Planned investment spending ________.

A)is equal to planned fix investment spending plus the amount of inventory investment planned by firms
B)is closely related to the real interest rate
C)is heavily influenced by expectations about the future
D)all of the above
E)none of the above

Question 7

The interest rate at which businesses borrow to fund their investments is higher than the real interest rate for short-term,safe loans,because ________.

A)business borrowers sometimes default on their loans
B)autonomous investment is not dependent on borrowed funds
C)the central bank controls the short-term,safe interest rate
D)the interest rate is negatively-related to business optimism
E)all of the above

Question 8

Consumption expenditures decrease when ________.

A)the real interest rate falls
B)disposable income increases
C)autonomous consumption increases
D)all of the above
E)none of the above

Question 9

When firms spend more on additional holdings of raw materials,parts and finished goods ________.

A)they are increasing their fixed investment
B)they are increasing their inventory investment
C)they are increasing their private consumption
D)all of the above
E)none of the above

Question 10

A decrease in "financial frictions" is associated with ________.

A)a decrease in the credit spread
B)more efficient functioning of financial markets
C)reduced real cost of borrowing for businesses
D)an increase in planned investment spending
E)all of the above

Question 11

Total planned expenditure (equals total output)is 14,000 when autonomous consumption expenditure is 450.When autonomous consumption expenditure falls to 400,total planned expenditure (equals total output)is 13,800.The marginal propensity to consume is ________.

A)0.89
B)0.75
C)0.99
D)0.44
E)0.03

Question 12

When the U.S.real interest rate rises ________.

A)U.S.dollar assets earn a lower return relative to foreign assets
B)makes U.S.exports more expensive in foreign currencies
C)imports will decrease
D)all of the above
E)none of the above

Question 13

Consumption expenditure is 15,000,government purchases are 5,000,planned investment spending is 4,000 and net exports are 1,500.If total output is 25,000,then unplanned inventory investment is ________.

A)negative 500
B)2,500
C)3,500
D)4,000
E)negative 450

Question 14

Planned investment spending ________.

A)is equal to planned fixed investment spending plus government investment
B)is unrelated to the real interest rate
C)is heavily influenced by expectations about the future
D)all of the above
E)none of the above

Question 15

The consumption function shows how ________.

A)the marginal propensity to consume varies with disposable income
B)income varies as a result of changes in consumption
C)consumption depends on the decision to save
D)all of the above
E)none of the above

Question 16

Investment spending ________.

A)is comprised of fixed and inventory investment
B)is negatively related to the real interest rate
C)is heavily influenced by what Keynes coined as "animal spirits"
D)all of the above
E)none of the above

Question 17

Fixed investment is typically ________.

A)smaller than inventory investment
B)calculated as the change in holdings of raw materials and finished goods
C)planned spending on equipment,structures,and new residential housing
D)all of the above
E)none of the above

Question 18

Total planned expenditure (equals income)is 13,500,autonomous consumption expenditure is 600,the marginal propensity to consume is 0.8,government purchases are 2,700,taxes are 2,500 and planned investment spending is 2,900.Net exports is ________.

A)3,840
B)negative 1,500
C)negative 1,380
D)negative 1,340
E)2,100

Question 19

If disposable income falls,consumption expenditure falls ________.

A)by an amount that depends on the real interest rate
B)so that planned expenditure remains constant
C)by an amount smaller than the decrease in disposable income
D)all of the above
E)none of the above

Question 20

Only when the goods market is in equilibrium is it true that ________.

A)actual expenditure equals output
B)the amount of goods and services produced equals actual expenditure
C)planned expenditure equals the amount of goods and services produced
D)demand for foreign goods equals foreigners' demand for domestic goods
E)none of the above

Question 21

In the IS curve,if Y falls for any given level of the real interest rate ________.

A)consumption decreases
B)output increases
C)saving increases
D)all of the above
E)none of the above

Question 22

Net exports ________.

A)are heavily determined by foreign demand for domestic goods
B)are heavily determined by domestic demand for domestic goods
C)are independent of domestic interest rate fluctuations
D)all of the above
E)none of the above

Question 23

In the IS curve,if Y falls for any given level of the real interest rate ________.

A)consumption increases
B)output increases
C)saving increases
D)all of the above
E)none of the above

Question 24

If aggregate output is below its equilibrium level ________.

A)there is an excess demand for goods
B)actual output is below planned expenditure
C)firms will tend to replenish their low inventories driving output up toward equilibrium
D)all of the above
E)none of the above

Question 25

In the IS equation,which of the following is an endogenous variable?

A)autonomous investment
B)autonomous net exports
C)taxes
D)all of the above
E)none of the above

Question 26

If aggregate output is above its equilibrium level ________.

A)there is an excess supply of goods
B)actual output is below planned expenditure
C)firms will tend to replenish their low inventories driving output up toward equilibrium
D)all of the above
E)none of the above

Question 27

A change in which of the following causes a movement along - not a shift in - the IS curve?

A)autonomous investment
B)autonomous net exports
C)taxes
D)all of the above
E)none of the above

Question 28

In the IS curve,if Y increases for any given level of the real interest rate ________.

A)consumption increases
B)output decreases
C)saving decreases
D)all of the above
E)none of the above

Question 29

Acme Brands invested $5 million in 2010 on new equipment,spent $750 thousand to increase its inventory of intermediate components,and added $25 thousand to its inventory of finished goods.At year's end,the components inventory is found to be $200 thousand above its beginning-of-the- year level,and finished goods inventory is up $30 thousand over its starting level.Calculate planned investment,unplanned investment,and actual (total)investment.

Question 30

What is the meaning of "animal spirits"? How do these relate to planned investment spending and to unplanned investment spending?

Question 31

The IS curve ________.

A)shows the relationship between aggregate output and the real interest rate when the goods market is in equilibrium
B)tells us that increases in autonomous consumption,investment,government purchases,or net exports raise output for any real interest rate
C)tells us that a decrease in taxes or in financial frictions leads to an increase in output for any given real interest rate
D)all of the above
E)none of the above

Question 32

A change in which of the following causes a shift in the IS curve?

A)autonomous investment
B)autonomous net exports
C)taxes
D)all of the above
E)none of the above

Question 33

Planned expenditures ________.

A)are directly affected by government purchases
B)increase when there is a reduction in taxes
C)decrease when disposable income decreases
D)all of the above
E)none of the above

Question 34

The IS curve ________.

A)traces out the points at which the goods market is in equilibrium
B)tells us that consumption expenditures fall as the real interest rises
C)tells us that as the real interest rate rises planned expenditures go down leading to decreases in output that satisfy the goods market equilibrium
D)all of the above
E)none of the above

Question 35

The investment function implies that current output does not influence investment.Does that make sense?

Question 36

The difference between the interest rate on loans to households and firms and the interest rate on completely safe assets is known as ________.

A)the fed funds rate
B)the discount rate
C)asymmetric information
D)the credit spread

Question 37

In the IS equation,which of the following is an endogenous variable?

A)government purchases
B)real interest rate
C)financial frictions
D)all of the above
E)none of the above

Question 38

A change in which of the following causes a movement along - not a shift in - the IS curve?

A)autonomous consumption
B)government purchases
C)financial frictions
D)all of the above
E)none of the above

Question 39

When the U.S.real interest rate rises ________.

A)U.S.dollar assets earn a higher return relative to foreign assets
B)makes U.S.exports cheaper in foreign currencies
C)imports will decrease
D)all of the above
E)none of the above

Question 40

According to the IS equation,a change in which of the following will cause a change in output?

A)real interest rate
B)autonomous investment
C)marginal propensity to consume
D)all of the above
E)none of the above

Question 41

IS Graph 1
On the graph above,unplanned inventory investment is negative at point ________.

A)A
B)B
C)G
D)H
E)none of the above

Question 42

When the goods market is returning to equilibrium following a decrease in the real interest rate,________.

A)saving and output are both rising
B)saving and output are both declining
C)saving is rising,while output declines
D)all of the above
E)none of the above

Question 43

Table 1

Given the values in the table above,if the real interest rate rises from 5 to 6,the change in household saving is ________.

A)negative 0.5
B)negative 1.55
C)negative 0.45
D)1.55
E)none of the above

Question 44

In the text,the equivalence of the goods market equilibrium in the IS model to the equilibrium in which desired investment equals desired saving is demonstrated,assuming that both government purchases and net exports are zero.Demonstrate the equivalence when both G and NX are non-zero.

Question 45

IS Graph 1
On the graph above,assuming that G = 0 and NX = 0,saving is above planned investment at point ________.

A)A
B)B
C)G
D)H
E)none of the above

Question 46

IS Graph 1
On the graph above,assuming that G = 0 and NX = 0,the labeled point at which saving is lowest is point ________.

A)A
B)B
C)G
D)H
E)not inferable from the information given

Question 47

Table 2

Using the values in the table above,and assuming that the real interest rate equals 4,calculate equilibrium values for consumption,household saving,investment,and net exports.Use these values to confirm that the goods market is in equilibrium.

Question 48

The IS curve ________.

A)shifts to the right when autonomous consumption increases
B)shifts up when the real interest rate increases
C)shifts to the left when autonomous investment increases
D)all of the above
E)none of the above

Question 49

Table 1

Given the values in the table above,consumption is ________ when equilibrium output is 15.

A)12.3
B)11.86
C)12.05
D)11.55
E)none of the above

Question 50

Table 1

Given the values in the table above,the IS curve is ________.

A)Y = 34.6 - 2r
B)Y = 8.65 - 2r
C)Y = 22.6 - 2r
D)Y = 8.33 - 0.67r
E)none of the above

Question 51

The IS curve ________ when the real interest rate increases.

A)shifts to the right
B)shifts to the left
C)shifts up
D)all of the above
E)none of the above

Question 52

If planned expenditure is below output,as the economy approaches equilibrium,________.

A)planned expenditure is rising
B)output is rising
C)saving is rising
D)all of the above
E)none of the above

Question 53

Table 1

Given the values in the table above,the real interest rate r = ________ when equilibrium output Y = 15.

A)9.8
B)3.8
C)3.18
D)10
E)none of the above

Question 54

If planned expenditure is below output,as the economy approaches equilibrium,________.

A)planned expenditure is falling
B)output is rising
C)saving is rising
D)all of the above
E)none of the above

Question 55

We may infer from the downward slope of the IS curve that lower interest rates are associated with ________.

A)higher output
B)higher saving and/or lower net exports
C)higher investment
D)all of the above
E)none of the above

Question 56

Table 1

Given the values in the table above,equilibrium output Y = ________ when the real interest rate r = 4.

A)26.6
B)0.65
C)14.6
D)5.65
E)none of the above

Question 57

In the IS equation,which of the following is an endogenous variable?

A)government purchases
B)real interest rate
C)consumption
D)all of the above
E)none of the above

Question 58

In the IS equation,which of the following is an exogenous variable?

A)planned investment spending
B)real interest rate
C)consumption
D)all of the above
E)none of the above

Question 59

IS Graph 1
On the graph above,the labeled point at which investment - planned plus unplanned - is highest is point ________.

A)A
B)B
C)G
D)H
E)not inferable from the information given

Question 60

IS Graph 1
On the graph above,output is above planned expenditures at point ________.

A)A
B)B
C)G
D)H
E)none of the above

Question 61

The IS curve shifts to the left when ________.

A)autonomous consumption increases
B)taxes increase
C)autonomous investment increases
D)all of the above
E)none of the above

Question 62

Qualitatively,an increase in government purchases has the same impact as an increase in autonomous ________.

A)consumption
B)investment
C)net exports
D)all of the above
E)none of the above

Question 63

The 2009 fiscal stimulus package did not work ________.

A)in that the IS curve did not shift to the right
B)because most of the intended increase in government spending took too long to kick in
C)because the increase in government spending was not enough to offset the decline in autonomous expenditure
D)all of the above
E)none of the above

Question 64

The IS curve shifts to the left when ________.

A)autonomous consumption increases
B)taxes decrease
C)autonomous investment decreases
D)all of the above
E)none of the above

Question 65

The IS curve shifts to the right when ________.

A)autonomous consumption decreases
B)taxes increase
C)autonomous investment increases
D)all of the above
E)none of the above

Question 66

If the government reduces spending ________.

A)the IS curve will shift to the right
B)output will increase if interest rates remain fixed
C)consumption will increase
D)all of the above
E)none of the above

Question 67

If the government increases military spending ________.

A)the IS curve would shift to the left
B)output will decrease if interest rates remain fixed
C)the unemployment rate could fall
D)all of the above
E)none of the above

Question 68

In the IS model,assuming that the real interest rate does not change,an increase in autonomous ________ leads to an increase in the equilibrium level of ________.

A)investment;net exports
B)consumption;government purchases
C)net exports;taxes
D)all of the above
E)none of the above

Question 69

In the IS model,assuming that the real interest rate does not change,an increase in autonomous ________ leads to an increase in the equilibrium level of ________.

A)investment;consumption
B)consumption;investment
C)net exports;investment
D)all of the above
E)none of the above

Question 70

An increase in autonomous consumption ________.

A)lowers planned expenditures
B)raises equilibrium output for any level of the interest rate
C)causes a movement down along the IS curve
D)all of the above
E)none of the above

Question 71

The 2009 fiscal stimulus package was passed ________.

A)to prevent the real interest rate from rising
B)to shift the IS curve to the left
C)to raise aggregate output at any interest rate
D)all of the above
E)none of the above

Question 72

In the IS model,assuming that the real interest rate does not change,an increase in autonomous net exports causes total investment,planned plus unplanned,to ________.

A)fall,then rise back to its initial level
B)fall,then rise above its initial level
C)rise,then fall back to its initial level
D)all of the above
E)none of the above

Question 73

If the government cuts taxes ________.

A)disposable income falls
B)planned expenditures rise
C)the IS curve shifts to the left
D)all of the above
E)none of the above

Question 74

A decrease in autonomous consumption ________.

A)lowers planned expenditures
B)raises equilibrium output for any level of the interest rate
C)causes a movement down along the IS curve
D)all of the above
E)none of the above

Question 75

In the IS model,assuming that the real interest rate does not change,an increase in autonomous ________ leads to a decrease in equilibrium saving.

A)investment
B)consumption
C)net exports
D)all of the above
E)none of the above

Question 76

The 2009 fiscal stimulus package did not work ________.

A)because rising interest rates nullified increased expenditures
B)because government spending rose too quickly and too briefly
C)but it probably prevented the IS curve from shifting further to the left
D)all of the above
E)none of the above

Question 77

If the government raises taxes ________.

A)planned expenditures fall
B)equilibrium output falls
C)the IS curve shifts to the left
D)all of the above
E)none of the above

Question 78

In the IS model,assuming that the real interest rate does not change,an increase in ________ leads to an increase in equilibrium saving by households.

A)autonomous consumption
B)taxes
C)financial frictions
D)all of the above
E)none of the above

Question 79

In the IS model,assuming that the real interest rate does not change,an increase in ________ leads to an increase in equilibrium saving by households.

A)autonomous investment
B)government purchases
C)autonomous net exports
D)all of the above
E)none of the above

Question 80

A decrease in autonomous consumption ________.

A)raises planned expenditures
B)lowers equilibrium output for any level of the interest rate
C)shifts the IS curve to the right
D)all of the above
E)none of the above