Question 1

In the money market, an increase in the money supply:

Accepted Answer

A) lowers income. 
B) raises income. 
C) has no effect on income. 
D) lowers velocity.

Question 2

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve:

Accepted Answer

A) is vertical. 
B) is horizontal. 
C) slopes upward and to the right. 
D) slopes downward and to the right.

Question 3

In the Keynesian-cross model with an MPC > 0, if government purchases increase 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 4

Along an IS curve all of the following are always true except:

Accepted Answer

A) planned expenditures equal actual expenditures. 
B) planned expenditures equal income. 
C) the demand for real balances equals the supply of real balances. 
D) there are no unplanned changes in inventories.

Question 5

Exhibit: Market for Real Money Balances  Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____.

Accepted Answer

A) sell; rise 
B) sell; fall 
C) buy; rise 
D) buy; fall

Question 6

One argument in favour of tax cuts over spending-based fiscal stimulus is that:

Accepted Answer

A) tax cuts increase the MPC by a larger amount than government spending. 
B) tax cuts temporarily increase planned spending, but government spending permanently increases private spending. 
C) in theory the tax multiplier is larger than the government spending multiplier. 
D) historically tax cuts have been more successful than spending-based fiscal stimulus.

Question 7

An LM curve shows combinations of:

Accepted Answer

A) taxes and government spending. 
B) nominal money balances and price levels. 
C) interest rates and income, which bring equilibrium in the market for real money balances. 
D) interest rates and income, which bring equilibrium in the market for goods and services.

Question 8

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 9

According to the theory of liquidity preference, the supply of real money balances:

Accepted Answer

A) decreases as the interest rate increases. 
B) increases as the interest rate increases. 
C) increases as income increases. 
D) is fixed by the central bank.

Question 10

The demand for money helps determine the equilibrium level of the interest rate, even though holding money does not earn any interest income. How is this possible?

Accepted Answer

The answer of The demand for money helps determine the...

Question 11

The intersection of the IS and LM curves determines the values of:

Accepted Answer

A) r, Y, and P, given G, T, and M. 
B) r, Y, and M, given G, T, and P. 
C) r and Y, given G, T, M, and P. 
D) p and Y, given G, T, and M.

Question 12

The theory of liquidity preference states that the quantity of real money balances demanded is:

Accepted Answer

A) negatively related to both the interest rate and income. 
B) positively related to both the interest rate and income. 
C) positively related to the interest rate and negatively related to income. 
D) negatively related to the interest rate and positively related to income.

Question 13

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

Accepted Answer

A) increases; downward 
B) increases; upward 
C) decreases; upward 
D) decreases; downward

Question 14

An increase in income raises money _____ and _____ the equilibrium interest rate.

Accepted Answer

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

Question 15

The IS curve shifts when any of the following economic variables change except:

Accepted Answer

A) the interest rate. 
B) government spending. 
C) taxes. 
D) the marginal propensity to consume.

Question 16

Along any given IS curve:

Accepted Answer

A) tax rates are fixed, but government spending varies. 
B) government spending is fixed, but taxes vary. 
C) both government spending and taxes vary. 
D) both government spending and taxes are fixed.

Question 17

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a.What is the numerical formula for the IS curve?

Accepted Answer

The answer of Assume that the consumption function is given...

Question 18

An increase in government spending generally shifts the IS curve:

Accepted Answer

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

Question 19

Exhibit: Keynesian Cross  In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

Accepted Answer

A) rise; increase 
B) rise; decrease 
C) fall; increase 
D) fall; decrease

Question 20

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

Accepted Answer

The answer of How can the government expenditure multiplier be...

Exam 11: Aggregate Demand I: Building the Islm Model