Question 1

Exhibit: IS-LM Fiscal Policy  Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

Accepted Answer

A) r2, Y2 
B) r3, Y2 
C) r2, Y3 
D) r3, Y3

Question 2

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

Accepted Answer

A) 200 and the interest rate falls by 2 percent. 
B) 100 and the interest rate falls by 1 percent. 
C) 50 and the interest rate falls by 0.5 percent. 
D) 200 and the interest rate remains unchanged.

Question 3

What are shocks? How do shocks respond to the IS and LM curves?

Accepted Answer

The answer of What are shocks? How do shocks respond...

Question 4

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level.

Accepted Answer

A) increase; IS 
B) decrease; IS 
C) increase; LM 
D) decrease; LM

Question 5

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation _____ the nominal interest rate and _____ the real interest rate, so that investment spending declines.

Accepted Answer

A) lowers; raises 
B) raises; lowers 
C) raises; raises 
D) lowers; lowers

Question 6

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____.

Accepted Answer

A) IS; shifts to the right 
B) IS; does not shift 
C) LM; shifts to the right 
D) LM; does not shift

Question 7

If the demand function for money is M / P = 0.5Y - 100r, then the slope of the LM curve is:

Accepted Answer

A) 0.001. 
B) 0.005. 
C) 0.01. 
D) 0.05.

Question 8

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.

Accepted Answer

The answer of What are the spending hypothesis and monetary...

Question 9

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _____ output and _____ interest rates.

Accepted Answer

A) increase; lower 
B) increase; raise 
C) lower; lower 
D) lower; raise

Question 10

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____.

Accepted Answer

A) IS; shifts to the right 
B) IS; does not shift 
C) LM; shifts to the right 
D) LM; does not shift

Question 11

When an economy expands its monetary and fiscal policies, how is the aggregate demand curve affected?

Accepted Answer

The answer of When an economy expands its monetary and...

Question 12

Investment depends on the _____ interest rate, and money demand depends on the _____ interest rate.

Accepted Answer

A) real; real 
B) nominal; nominal 
C) real; nominal 
D) nominal; real

Question 13

Policymakers are contemplating undertaking either an increase in government spending or an increase in the money supply. Either policy is forecast to have the same impact on income in the short run. Use the IS-LM model to compare the impact on consumption and investment of the two policy alternatives.

Accepted Answer

The answer of Policymakers are contemplating undertaking either an increase...

Question 14

Economists who believe that monetary policy is more potent than fiscal policy argue that the:

Accepted Answer

A) responsiveness of money demand to the interest rate is large. 
B) responsiveness of money demand to the interest rate is small. 
C) IS curve is nearly vertical. 
D) LM curve is nearly horizontal.

Question 15

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____.

Accepted Answer

A) LM; right 
B) LM; left 
C) IS; right 
D) IS; left

Question 16

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

Accepted Answer

A) investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. 
B) investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. 
C) investment is autonomous, whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. 
D) the price level is fixed, whereas in the IS-LM model it is allowed to vary.

Question 17

A liquidity trap occurs when:

Accepted Answer

A) banks have too much currency and close their doors to new customers. 
B) the central bank mistakenly prints too much money, generating hyperinflation. 
C) interest rates fall so low that monetary policy is no longer effective. 
D) dams and locks are built to prevent flooding.

Question 18

An increase in government spending raises income:

Accepted Answer

A) and the interest rate in the short run but leaves both unchanged in the long run. 
B) in the short run but leaves it unchanged in the long run, while lowering investment. 
C) in the short run but leaves it unchanged in the long run, while lowering consumption. 
D) and the interest rate in both the short run and in the long run.

Question 19

An economic change that does not shift the aggregate demand curve is a change in:

Accepted Answer

A) the money supply. 
B) the investment function. 
C) the price level. 
D) taxes.

Question 20

To stabilize falling prices in 1930, what did Pigou suggest?

Accepted Answer

The answer of To stabilize falling prices in 1930, what...

Exam 12: Aggregate Demand Ii: Applying the Islm Model

Exhibit: IS-LM Fiscal Policy Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, an increase in government spending would generate the new equilibrium combination of interest rate and income:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) ^d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

What are shocks? How do shocks respond to the IS and LM curves?

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _, shifting the _ curve to the right and returning output to the natural level.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation _ the nominal interest rate and _ the real interest rate, so that investment spending declines.

An increase in the money supply shifts the _ curve to the right, and the aggregate demand curve _.

If the demand function for money is M / P = 0.5Y - 100r, then the slope of the LM curve is:

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _ output and _ interest rates.

A decrease in the price level shifts the _ curve to the right, and the aggregate demand curve _.

When an economy expands its monetary and fiscal policies, how is the aggregate demand curve affected?

Investment depends on the _ interest rate, and money demand depends on the _ interest rate.

Economists who believe that monetary policy is more potent than fiscal policy argue that the:

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _ curve to the _.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

A liquidity trap occurs when:

An increase in government spending raises income:

An economic change that does not shift the aggregate demand curve is a change in:

To stabilize falling prices in 1930, what did Pigou suggest?

Exam 12: Aggregate Demand Ii: Applying the Islm Model

Exhibit: IS-LM Fiscal Policy Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

What are shocks? How do shocks respond to the IS and LM curves?

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation _____ the nominal interest rate and _____ the real interest rate, so that investment spending declines.

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____.

If the demand function for money is M / P = 0.5Y - 100r, then the slope of the LM curve is:

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _____ output and _____ interest rates.

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____.

When an economy expands its monetary and fiscal policies, how is the aggregate demand curve affected?

Investment depends on the _____ interest rate, and money demand depends on the _____ interest rate.

Economists who believe that monetary policy is more potent than fiscal policy argue that the:

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

A liquidity trap occurs when:

An increase in government spending raises income:

An economic change that does not shift the aggregate demand curve is a change in:

To stabilize falling prices in 1930, what did Pigou suggest?

Exhibit: IS-LM Fiscal Policy Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, an increase in government spending would generate the new equilibrium combination of interest rate and income:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) ^d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _, shifting the _ curve to the right and returning output to the natural level.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation _ the nominal interest rate and _ the real interest rate, so that investment spending declines.

An increase in the money supply shifts the _ curve to the right, and the aggregate demand curve _.

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _ output and _ interest rates.

A decrease in the price level shifts the _ curve to the right, and the aggregate demand curve _.

Investment depends on the _ interest rate, and money demand depends on the _ interest rate.

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _ curve to the _.