Deck 9: The Is Curve

Question 1

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

Answer 1

makes U.S. exports more expensive in foreign currencies

Question 2

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

Answer 2

negative 1,500

Question 3

Total aggregate demand includes ________.

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

Answer 3

all of the above

Question 4

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 5

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

Question 6

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 7

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

Question 8

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 9

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 10

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

Question 11

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 12

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 13

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

Question 14

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 15

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 16

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 17

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 18

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 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

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 21

In the IS curve ________.

A) an increase in the interest rate constitutes an upward movement along the curve
B) an increase in aggregate consumption constitutes a downward movement along the curve
C) an increase in taxes constitutes a rightward shift of the curve
D) all of the above
E) none of the above

Question 22

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 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

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) 17
D) 5.65
E) none of the above

Question 25

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 26

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 27

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 = 25 - 2r
D) Y = 8.33 - 0.67r
E) none of the above

Question 28

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 29

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 leads to increases in output for any given real interest rate
D) all of the above
E) none of the above

Question 30

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 31

The reason for the downward-sloping IS curve is that ________.

A) lower interest rates lead to higher saving and higher output
B) higher interest rates lead to higher saving and lower output
C) higher interest rates lead to lower saving and higher output
D) all of the above
E) none of the above

Question 32

The reason for the downward-sloping IS curve is that ________.

A) lower interest rates lead to lower saving and lower output
B) lower interest rates lead to lower saving and higher output
C) higher interest rates lead to lower saving and higher output
D) all of the above
E) none of the above

Question 33

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 34

The IS curve ________.

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

Question 35

In the IS curve, a cut in taxes ________.

A) causes planned expenditures and hence equilibrium output to rise when the interest rate increases
B) causes planned expenditures and hence equilibrium output to fall when the interest rate increases
C) causes the equilibrium interest rates to fall
D) all of the above
E) none of the above

Question 36

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 37

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

Question 38

Table 1

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

A) 9.8
B) 5
C) 3.18
D) 10
E) none of the above

Question 39

Table 1

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

A) 12.3
B) 11.8
C) 12.05
D) 11.55
E) none of the above

Question 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

AAA

Question 49

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 50

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 51

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 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

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

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 63

A decrease in autonomous investment ________.

A) increases equilibrium output at any interest rate
B) causes a movement down along the IS curve
C) shifts the IS curve to the left
D) all of the above
E) none of the above

Question 64

IS Graph 2
On the graph above, a possible cause of the rightward shift of the IS curve is an increase in ________.

A) foreign demand for domestic goods
B) taxes
C) domestic demand for foreign goods
D) the exchange rate
E) none of the above

Question 65

IS Graph 2
On the graph above, if the economy is at point A when the real interest rate falls, the economy's new situation might be indicated by point ________.

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

Question 66

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 67

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 68

IS Graph 2
On the graph above, the amount of inventory depletion will be greatest if the economy is moving from point ________ to point ________.

A) A; D
B) D; A
C) D; C
D) B; A
E) B; C

Question 69

IS Graph 2
On the graph above, if the U.S. economy is at point B in 2009, then the economy in 2010 is best represented by point ________.

A) A
B) B
C) C
D) D
E) any of the labeled points is as good as the others

Question 70

An increase in autonomous investment ________.

A) increases equilibrium output at any interest rate
B) causes a movement down along the IS curve
C) shifts the IS curve to the left
D) all of the above
E) none of the above

Question 71

In a stock market boom ________.

A) autonomous consumption might increase because stock holders might feel richer and consume more
B) autonomous investment might increase because a higher stock value for a firm helps firms raise funds for increased investment
C) the IS curve might shift to the right
D) all of the above
E) none of the above

Question 72

IS Graph 2
On the graph above, unplanned inventory investment occurs if the economy is moving from point ________ to point ________.

A) D; C
B) C; B
C) B; A
D) all of the above
E) none of the above

Question 73

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) the price level
D) all of the above
E) none of the above

Question 74

If people feel optimistic about the future of the economy ________.

A) autonomous consumption might increase
B) autonomous investment might increase
C) it might shift the IS curve to the right
D) all of the above
E) none of the above

Question 75

In a stock market boom ________.

A) government spending will decrease
B) interest rates will decrease
C) saving is likely to decrease
D) all of the above
E) none of the above

Question 76

A decrease in autonomous investment ________.

A) decreases equilibrium output at any interest rate
B) lowers planned expenditures
C) shifts the IS curve to the left
D) all of the above
E) none of the above

Question 77

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 78

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 79

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 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