Question 1

a.Graphically illustrate how an increase in income affects the equilibrium levels of saving,investment,and the interest rate in the loanable funds model.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curve shifts to
v.the terminal equilibrium values.b.Explain in words what happens to the equilibrium levels of saving,investment,and the interest rates as a result of the increase in income.

Accepted Answer

a.
 b. The equilibrium levels of saving and investment increase.The interest rate falls.

Question 2

Explain why an increase in the money supply,which is a change in the money market,will upset the equilibrium in the goods market.

Accepted Answer

An increase in the money supply will decrease the equilibrium interest rate in the money market.A lower interest rate will increase investment spending in the goods market,which will increase the equilibrium level of income in the goods market.Graphically,this is represented by a shift in the LM curve to the right and a movement down the IS curve.

Question 3

According to the theory of liquidity preference,if the supply of real money balances exceeds the demand for real money balances,individuals will:

Accepted Answer

A)   sell interest-earning assets in order to obtain non-interest-bearing money.
B)   purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C)   purchase more goods and services.
D)   be content with their portfolios. B

Question 4

Use the following to answer questions :
Exhibit: Market for Real Money Balances
 
-(Exhibit: Market for Real Money Balances)Based on the graph,the equilibrium levels of interest rates and real money balances are:

Accepted Answer

A)   r1 and M1/P1.
B)   r2 and M2/P2.
C)   r3 and M2/P2.
D)   r3 and M3/P3.

Question 5

All of the following items shrink the expenditure multiplier in the Keynesian-cross model except:

Accepted Answer

A)   savings.
B)   imports.
C)   transfers,such as Canada Pension Plan receipts.
D)   taxes.

Question 6

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of $\Delta$T will:

Accepted Answer

A)   decrease equilibrium income by  Δ\DeltaΔ T.
B)   decrease equilibrium income by  Δ\DeltaΔ T/(1 - MP
C)  .
C)   decrease equilibrium income by ( Δ\DeltaΔ T) (MP
C)  /(1 - MP
C)  .
D)   not affect equilibrium income at all.

Question 7

a.Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curve shifts
v.the terminal equilibrium values.b.Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

Accepted Answer

The answer of a.Use the Keynesian-cross model to illustrate graphically...

Question 8

If the quantity theory of money is valid,then the LM curve:

Accepted Answer

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

Question 9

An explanation for the slope of the LM curve is that as:

Accepted Answer

A)   the interest rate increases,income becomes higher.
B)   the interest rate increases,income becomes lower.
C)   income rises,money demand rises,and a higher interest rate is required.
D)   income rises,money demand rises,and a lower interest rate is required.

Question 10

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

Accepted Answer

A)   consumption function.
B)   interest rate.
C)   price level.
D)   nominal money supply.

Question 11

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

Accepted Answer

A)   is chosen by the central bank.
B)   depends on the interest rate.
C)   varies with the price level.
D)   changes as the level of income changes.

Question 12

Equilibrium levels of income and interest rates are ______ related in the goods and services market,and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

Accepted Answer

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

Question 13

The Keynesian-cross analysis assumes planned investment:

Accepted Answer

A)   is fixed and so does the IS analysis.
B)   depends on the interest rate and so does the IS analysis.
C)   is fixed,whereas the IS analysis assumes it depends on the interest rate.
D)   depends on the interest rate unlike IS analysis which assumes planned investment is fixed.

Question 14

Suppose the government passes legislation that significantly reduces taxes.a.Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curve shifts
v.the terminal equilibrium values.b.Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

Accepted Answer

The answer of Suppose the government passes legislation that significantly...

Question 15

The Keynesian cross shows:

Accepted Answer

A)   determination of equilibrium income and the interest rate in the short run.
B)   determination of equilibrium income and the interest rate in the long run.
C)   equality of planned expenditure and income in the short run.
D)   equality of planned expenditure and income in the long run.

Question 16

Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)

Accepted Answer

The answer of Compare how equilibrium is attained in the...

Question 17

If money demand does not depend on the interest rate,then the LM curve is ______ and ______ policy has no effect on output.

Accepted Answer

A)   horizontal; fiscal
B)   vertical; fiscal
C)   horizontal; monetary
D)   vertical; monetary

Question 18

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______,and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

Accepted Answer

A)   saving and investment; planned spending
B)   real-money balances; loanable funds
C)   goods and services; real-money balances
D)   real-money balances; goods and services

Question 19

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.Assume that the marginal propensity to consume is unchanged,but the intercept of the consumption function is made smaller so that at every income level saving is greater.This will:

Accepted Answer

A)   lower equilibrium income by the decrease in the intercept multiplied by the multiplier.
B)   lower equilibrium income by the decrease in the intercept.
C)   raise equilibrium income by the decrease in the intercept.
D)   raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Question 20

An interpretation of why the IS curve slopes downward and to the right is that as income rises,national saving rises,and this increase drives the interest rate:

Accepted Answer

A)   down,thereby decreasing investment.
B)   down,thereby increasing investment.
C)   up,thereby decreasing investment.
D)   up,thereby increasing investment.

Exam 10: Aggregate Demand I

Explain why an increase in the money supply,which is a change in the money market,will upset the equilibrium in the goods market.

According to the theory of liquidity preference,if the supply of real money balances exceeds the demand for real money balances,individuals will:

Use the following to answer questions : Exhibit: Market for Real Money Balances -(Exhibit: Market for Real Money Balances) Based on the graph,the equilibrium levels of interest rates and real money balances are:

All of the following items shrink the expenditure multiplier in the Keynesian-cross model except:

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of $\Delta$ T will:

If the quantity theory of money is valid,then the LM curve:

An explanation for the slope of the LM curve is that as:

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

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

Equilibrium levels of income and interest rates are related in the goods and services market,and equilibrium levels of income and interest rates are related in the market for real money balances.

The Keynesian-cross analysis assumes planned investment:

The Keynesian cross shows:

Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)

If money demand does not depend on the interest rate,then the LM curve is and policy has no effect on output.

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ,and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.Assume that the marginal propensity to consume is unchanged,but the intercept of the consumption function is made smaller so that at every income level saving is greater.This will:

An interpretation of why the IS curve slopes downward and to the right is that as income rises,national saving rises,and this increase drives the interest rate:

Exam 10: Aggregate Demand I

Explain why an increase in the money supply,which is a change in the money market,will upset the equilibrium in the goods market.

According to the theory of liquidity preference,if the supply of real money balances exceeds the demand for real money balances,individuals will:

Use the following to answer questions : Exhibit: Market for Real Money Balances -(Exhibit: Market for Real Money Balances) Based on the graph,the equilibrium levels of interest rates and real money balances are:

All of the following items shrink the expenditure multiplier in the Keynesian-cross model except:

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of Δ\DeltaΔ T will:

If the quantity theory of money is valid,then the LM curve:

An explanation for the slope of the LM curve is that as:

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

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

Equilibrium levels of income and interest rates are ______ related in the goods and services market,and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

The Keynesian-cross analysis assumes planned investment:

The Keynesian cross shows:

Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)

If money demand does not depend on the interest rate,then the LM curve is ______ and ______ policy has no effect on output.

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______,and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.Assume that the marginal propensity to consume is unchanged,but the intercept of the consumption function is made smaller so that at every income level saving is greater.This will:

An interpretation of why the IS curve slopes downward and to the right is that as income rises,national saving rises,and this increase drives the interest rate:

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of $\Delta$ T will:

Equilibrium levels of income and interest rates are related in the goods and services market,and equilibrium levels of income and interest rates are related in the market for real money balances.

If money demand does not depend on the interest rate,then the LM curve is and policy has no effect on output.

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ,and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .