Question 1

The Pigou effect suggests that falling prices will increase income because real balances influence _____ and will shift the _____ curve.

Accepted Answer

A) money demand; LM 
B) the money supply; LM 
C) consumer spending; IS 
D) government spending; IS

Question 2

The interaction of the IS curve and the LM curve determines:

Accepted Answer

A) the price level and the inflation rate. 
B) the level of output and the price level. 
C) investment and the money supply. 
D) the equilibrium level of the interest rate and output.

Question 3

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

Accepted Answer

A) lower; raises; reduces 
B) higher; lowers; increases 
C) lower; lowers; increases 
D) higher; raises; reduces

Question 4

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is _____ for an increase in government purchases using the Keynesian-cross analysis.

Accepted Answer

A) larger than the multiplier 
B) the same as the multiplier 
C) smaller than the multiplier 
D) sometimes larger and sometimes smaller than the multiplier

Question 5

Exhibit: Short Run to Long Run  Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _____, with a _____ price level.

Accepted Answer

A) B; higher 
B) B; lower 
C) C; higher 
D) C; lower

Question 6

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____.

Accepted Answer

A) rises; falls 
B) rises; rises 
C) falls; rises 
D) falls; falls

Question 7

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

Accepted Answer

A) prices. 
B) investment. 
C) the money supply. 
D) taxes.

Question 8

An increase in the money supply:

Accepted Answer

A) increases income and lowers the interest rate in both the short run and in the long run. 
B) increases income in both the short run and in the long run but leaves the interest rate unchanged in the long run. 
C) lowers the interest rate in both the short run and in the long run but leaves income unchanged in the long run. 
D) lowers the interest rate and increases income in the short run but leaves both unchanged in the long run.

Question 9

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

Accepted Answer

A) 100. 
B) 200. 
C) 300. 
D) 400.

Question 10

An increase in consumer saving for any given level of income will shift the:

Accepted Answer

A) LM curve upward and to the left. 
B) LM curve downward and to the right. 
C) IS curve downward and to the left. 
D) IS curve upward and to the right.

Question 11

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _____.

Accepted Answer

A) resulting from a change in monetary policy; resulting from a change in fiscal policy 
B) resulting from a change in fiscal policy; resulting from a change in monetary policy 
C) at a given price level; resulting from a change in the price level 
D) resulting from a change in the price level; at a given price level

Question 12

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

Accepted Answer

A) income, the interest rate, consumption, and investment are unchanged. 
B) income and the interest rate rise, whereas consumption and investment fall. 
C) income and the interest rate fall, whereas consumption and interest rise. 
D) income, the interest rate, consumption, and investment all rise.

Question 13

How can the Bank of Canada keep the economy from falling into a recession if the budget deficit is reduced? Use the IS-LM model to illustrate graphically the impact of both the fiscal policy reducing the deficit and the monetary policy, which prevents output from falling. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.

Accepted Answer

The answer of How can the Bank of Canada keep...

Question 14

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

Accepted Answer

A) 200. 
B) 300. 
C) 400. 
D) 500.

Question 15

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Accepted Answer

A) both output and the price level will increase. 
B) output will decrease, but the price level will increase. 
C) output will increase, but the price level will decrease. 
D) both output and the price level will decrease.

Question 16

Exhibit: Policy Interaction  Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Bank of Canada should _____ the money supply, shifting to _____.

Accepted Answer

A) increase; LM2 
B) decrease; LM2 
C) increase; LM3 
D) decrease; LM3

Question 17

One policy response to an economic slowdown is to cut taxes. This policy response 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 18

Assume the following model of the economy, with the price level fixed at 1.0: C = 0.8(Y - T) T = 1,000 I = 800 - 20r G = 1,000 Y = C + I + G M^s/ P = M^d/ P = 0.4Y - 40r M^s= 1,200 a.Write a formula for the IS curve, showing Y as a function of r alone.

Accepted Answer

The answer of Assume the following model of the economy,...

Question 19

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Accepted Answer

A) Y = 1,100, r = 6 percent. 
B) Y = 1,200, r = 5 percent. 
C) Y = 1,000, r = 5 percent. 
D) Y = 1,100, r = 5 percent.

Question 20

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

Accepted Answer

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

Exam 12: Aggregate Demand Ii: Applying the Islm Model

The Pigou effect suggests that falling prices will increase income because real balances influence _ and will shift the _ curve.

The interaction of the IS curve and the LM curve determines:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ___ real money supply M / P, which _ the interest rate and ___ spending.

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is _____ for an increase in government purchases using the Keynesian-cross analysis.

Exhibit: Short Run to Long Run Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _, with a _ price level.

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

An increase in the money supply:

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

An increase in consumer saving for any given level of income will shift the:

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _ curve to the _.

Assume the following model of the economy, with the price level fixed at 1.0: C = 0.8(Y - T) T = 1,000 I = 800 - 20r G = 1,000 Y = C + I + G M^s/ P = M^d/ P = 0.4Y - 40r M^s= 1,200 a.Write a formula for the IS curve, showing Y as a function of r alone.

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

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

Exam 12: Aggregate Demand Ii: Applying the Islm Model

The Pigou effect suggests that falling prices will increase income because real balances influence _____ and will shift the _____ curve.

The interaction of the IS curve and the LM curve determines:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is _____ for an increase in government purchases using the Keynesian-cross analysis.

Exhibit: Short Run to Long Run Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _____, with a _____ price level.

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____.

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

An increase in the money supply:

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

An increase in consumer saving for any given level of income will shift the:

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _____.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _____ curve to the _____.

Assume the following model of the economy, with the price level fixed at 1.0: ​ ​ C = 0.8(Y - T) T = 1,000 ​ I = 800 - 20r G = 1,000 ​ Y = C + I + G Ms / P = Md / P = 0.4Y - 40r ​ Ms = 1,200 ​ ​ a.Write a formula for the IS curve, showing Y as a function of r alone.

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

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

The Pigou effect suggests that falling prices will increase income because real balances influence _ and will shift the _ curve.

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ___ real money supply M / P, which _ the interest rate and ___ spending.

Exhibit: Short Run to Long Run Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _, with a _ price level.

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _.

One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _ curve to the _.

Assume the following model of the economy, with the price level fixed at 1.0: C = 0.8(Y - T) T = 1,000 I = 800 - 20r G = 1,000 Y = C + I + G M^s/ P = M^d/ P = 0.4Y - 40r M^s= 1,200 a.Write a formula for the IS curve, showing Y as a function of r alone.