Question 1

In the long-run ISLM model and with everything else held constant,the long-run effect of a tax cut is to ________ real output and ________ the interest rate.

Accepted Answer

A)  increase; increase 
B)  increase; not change 
C)  not change; increase 
D)  not change; decrease

Question 2

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.

Accepted Answer

A)  right; supply 
B)  right; demand 
C)  left; supply 
D)  left; demand

Question 3

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.

Accepted Answer

A)  supply; fall 
B)  supply; rise 
C)  demand; fall 
D)  demand; rise

Question 4

As long as the level of output ________ the natural rate level,the price level will continue to ________,shifting the LM curve to the ________,until finally output is back at the natural rate level.

Accepted Answer

A)  exceeds; rise; right 
B)  exceeds; rise; left 
C)  remains below; fall; left 
D)  remains below; rise; right

Question 5

In the money market,a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate,everything else held constant.

Accepted Answer

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

Question 6

In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.

Accepted Answer

A)  positively; positively 
B)  positively; negatively 
C)  negatively; negatively 
D)  negatively; positively

Question 7

The money market is in equilibrium ________.

Accepted Answer

A)  at any point on the IS curve 
B)  at any point on the LM curve 
C)  at only one point on the LM curve 
D)  only at the intersection of the IS and LM curves

Question 8

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.

Accepted Answer

A)  right; supply 
B)  right; demand 
C)  left; supply 
D)  left; demand

Question 9

Everything else held constant,a monetary contraction is characterized by ________ output and ________ interest rates.

Accepted Answer

A)  rising; rising 
B)  rising; falling 
C)  falling; rising 
D)  falling; falling

Question 10

In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.

Accepted Answer

A)  positively; positively 
B)  positively; negatively 
C)  negatively; negatively 
D)  negatively; positively

Question 11

Everything else held constant,a monetary expansion is characterized by ________ output and ________ interest rates.

Accepted Answer

A)  rising; rising 
B)  rising; falling 
C)  falling; rising 
D)  falling; falling

Question 12

The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as ________.

Accepted Answer

A)  fiscal neutrality 
B)  a recession 
C)  complete crowding out 
D)  inflation

Question 13

If the Fed adopts a policy of pegging the interest rate,a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________.

Accepted Answer

A)  fall; increasing 
B)  fall; decreasing 
C)  rise; decreasing 
D)  rise; increasing

Question 14

If the ________ curve is relatively more unstable than the ________ curve,a money supply target is preferred.

Accepted Answer

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

Question 15

The less interest-sensitive is money demand,the ________.

Accepted Answer

A)  more effective is fiscal policy relative to monetary policy 
B)  more effective is monetary policy relative to fiscal policy 
C)  steeper is the IS curve 
D)  flatter is the LM curve

Question 16

If the quantity of money demanded is not affected by changes in the interest rate,the LM curve is ________ and fiscal policy will be ________.

Accepted Answer

A)  horizontal; very effective 
B)  horizontal; ineffective 
C)  vertical; ineffective 
D)  vertical; very effective

Question 17

Using the appropriate diagram,show that fiscal policy is ineffective in the long-run.

Accepted Answer

The answer of Using the appropriate diagram,show that fiscal policy...

Question 18

As aggregate output rises,the demand for money ________ and the interest rate ________,so that money demanded equals money supplied and the money market is in equilibrium.

Accepted Answer

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

Question 19

If the economy is on the IS curve,but is to the left of the LM curve,aggregate output will ________ and the interest rate will ________.

Accepted Answer

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

Question 20

The key assumption in the ISLM model is that ________.

Accepted Answer

A)  the price level is fixed 
B)  the inflation rate is zero 
C)  there is no role for interest rates 
D)  Both A and B.

Exam 28: The ISLM Model

In the long-run ISLM model and with everything else held constant,the long-run effect of a tax cut is to real output and the interest rate.

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess of money which will cause the interest rate to fall.

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess of money which will cause the interest rate to .

As long as the level of output the natural rate level,the price level will continue to ,shifting the LM curve to the ,until finally output is back at the natural rate level.

In the money market,a condition of excess demand for money can be eliminated by a in aggregate output or a in the interest rate,everything else held constant.

In the Keynesian model the quantity of money demanded is related to income and related to the interest rate.

The money market is in equilibrium ________.

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess of money which will cause the interest rate to fall.

Everything else held constant,a monetary contraction is characterized by output and interest rates.

In the Keynesian model the quantity of money demanded is related to income and related to the interest rate.

Everything else held constant,a monetary expansion is characterized by output and interest rates.

The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as ________.

If the Fed adopts a policy of pegging the interest rate,a in government spending forces the Fed to increase the money supply to prevent interest rates from .

If the curve is relatively more unstable than the curve,a money supply target is preferred.

The less interest-sensitive is money demand,the ________.

If the quantity of money demanded is not affected by changes in the interest rate,the LM curve is and fiscal policy will be .

Using the appropriate diagram,show that fiscal policy is ineffective in the long-run.

As aggregate output rises,the demand for money and the interest rate ,so that money demanded equals money supplied and the money market is in equilibrium.

If the economy is on the IS curve,but is to the left of the LM curve,aggregate output will and the interest rate will .

The key assumption in the ISLM model is that ________.