Question 1

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the
LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
e. If M increases and P is constant, does the LM curve shift upward and to the left or downward and to the right?
f. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?

Accepted Answer

The answer of Assume that the equilibrium in the money...

Question 2

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

Accepted Answer

A) liquidity preference. 
B) the government-purchases multiplier. 
C) unplanned inventory investment. 
D) real money balances.

Question 3

Suppose Congress passes legislation that significantly reduces taxes. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

Accepted Answer

The answer of Suppose Congress passes legislation that significantly reduces...

Question 4

Explain why a decrease in planned investment, which is a change in the goods market, will upset the equilibrium in the money market.

Accepted Answer

The answer of Explain why a decrease in planned investment,...

Question 5

When firms experience unplanned inventory accumulation, they typically:

Accepted Answer

A) build new plants. 
B) lay off workers and reduce production. 
C) hire more workers and increase production. 
D) call for more government spending.

Question 6

As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

Accepted Answer

The answer of As an economy moves into a recession,...

Question 7

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

Accepted Answer

A) income falls. 
B) planned expenditure falls. 
C) unplanned inventory investment is negative. 
D) prices rise.

Question 8

Both Keynesians and supply-siders believe a tax cut will lead to growth:

Accepted Answer

A) and both agree it works through incentive effects. 
B) but Keynesians believe it works through incentive effects whereas supply-siders believe it works through aggregate demand. 
C) but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects. 
D) and both agree it works through aggregate demand.

Question 9

Explain what force moves the market back to equilibrium if the market is initially in disequilibrium in:
a. the market for goods and services;
b. the market for real money balances.

Accepted Answer

The answer of Explain what force moves the market back...

Question 10

In the IS-LM model, which two variables are influenced by the interest rate?

Accepted Answer

A) supply of nominal money balances and demand for real balances 
B) demand for real money balances and government purchases 
C) supply of nominal money balances and investment spending 
D) demand for real money balances and investment spending

Question 11

The simple investment function shows that investment as increases.

Accepted Answer

A) decreases; the interest rate 
B) increases; the interest rate 
C) decreases; government spending 
D) increases; government spending

Question 12

The IS-LM model simultaneously determines equilibrium in two markets.
a. Which two markets?
b. What two variables adjust to bring equilibrium in the markets?

Accepted Answer

The answer of The IS-LM model simultaneously determines equilibrium in...

Question 13

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

Accepted Answer

A) income equals consumption plus investment plus government spending. 
B) planned expenditure equals consumption plus planned investment plus government spending. 
C) actual expenditure equals planned expenditure. 
D) actual saving equals actual investment.

Question 14

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

Accepted Answer

A) zero. 
B) between zero and one. 
C) one. 
D) greater than one.

Question 15

In the Keynesian-cross model, the equilibrium level of income is determined by:

Accepted Answer

A) the factors of production. 
B) the money supply. 
C) planned spending. 
D) liquidity preference.

Question 16

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

Accepted Answer

A) increases by 250. 
B) increases by more than 250. 
C) decreases by 250. 
D) increases, but by less than 250.

Question 17

Compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect. Can you reconcile this difference?

Accepted Answer

The answer of Compare the predicted impact of an increase...

Question 18

Suppose Congress decides to reduce the budget deficit by cutting government spending. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.

Accepted Answer

The answer of Suppose Congress decides to reduce the budget...

Question 19

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

Accepted Answer

A) sell interest-earning assets in order to obtain non-interest-bearing money. 
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. 
C) purchase fewer goods and services. 
D) be content with their portfolios.

Question 20

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by: one unit.

Accepted Answer

A) ∆G. 
B) ∆G divided by the quantity one minus the marginal propensity to consume. 
C) ∆G multiplied by the quantity one plus the marginal propensity to consume.

Exam 11: Aggregate Demand II: Applying the Is-Lm Model