Question 1

In the long-run the ISLM model predicts that ________ can change real output.

Accepted Answer

A) only monetary policy 
B) only fiscal policy 
C) both monetary and fiscal policy 
D) neither monetary nor fiscal policy

Question 2

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 3

If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output.

Accepted Answer

A) an interest rate; larger 
B) a money supply; smaller 
C) a money supply; larger 
D) an exchange rate; smaller

Question 4

If the economy is characterized by a certain and stable LM curve, then ________ target produces ________ fluctuations in aggregate output.

Accepted Answer

A) an interest rate; smaller 
B) a money supply; smaller 
C) a money supply; larger 
D) an exchange rate; larger

Question 5

In the money market, a condition of excess supply of 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

Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

Accepted Answer

The answer of Show graphically and explain why targeting an...

Question 7

The long-run neutrality of money refers to the fact that in the long run, monetary policy ________.

Accepted Answer

A) changes only real output 
B) changes only the real interest rate 
C) changes both real output and the real interest rate 
D) has no effect on either real output or the real interest rate

Question 8

Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change?

Accepted Answer

The answer of Using the ISLM model, explain the effects...

Question 9

If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred.

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

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 12

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

Accepted Answer

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

Question 13

Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if ________.

Accepted Answer

A) consumer confidence decreases sharply 
B) there is an investment boom 
C) the money supply increases 
D) taxes are cut

Question 14

When is the targeting of the money supply preferred to the interest-rate target? support your answer with the appropriate diagram.

Accepted Answer

The answer of When is the targeting of the money...

Question 15

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 16

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 17

An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant.

Accepted Answer

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

Question 18

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 19

As interest rates rise, the opportunity cost of holding money ________ and the demand for money ________.

Accepted Answer

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

Question 20

In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure 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

Exam 28: The ISLM Model

In the long-run the ISLM model predicts that ________ can change real output.

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

If the economy is characterized by a stable IS curve and an unstable LM curve, then target produces fluctuations in aggregate output.

If the economy is characterized by a certain and stable LM curve, then target produces fluctuations in aggregate output.

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

Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

The long-run neutrality of money refers to the fact that in the long run, monetary policy ________.

Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change?

If the curve is relatively more unstable than the curve, an interest rate target is preferred.

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

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 of the LM curve, then there is an excess demand of money which will cause the interest rate to .

Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if ________.

When is the targeting of the money supply preferred to the interest-rate target? support your answer with the appropriate diagram.

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 left of the LM curve, then there is an excess of money which will cause the interest rate to .

An increase in spending that results from expansionary policy causes the interest rate to , everything else held constant.

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 .

As interest rates rise, the opportunity cost of holding money and the demand for money .

In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure is to real output and the interest rate.