Question 1

Compare the impact of a tax cut on consumption, investment, output, and interest rates in the classical model of Chapter 3 versus the IS-LM model.

Accepted Answer

The answer of Compare the impact of a tax cut...

Question 2

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

Accepted Answer

A)  output is fixed; prices are fixed 
B)  prices are fixed; output is fixed 
C)  the interest rate is fixed; the money supply is fixed 
D)  prices are flexible; output varies

Question 3

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 4

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

Accepted Answer

A)  greater; greater 
B)  greater; smaller 
C)  smaller; smaller 
D)  smaller; greater

Question 5

Assume that an economy is characterized by the following equations: C = 100 + (2/3)(Y - T) T = 600 G = 500 I = 800 - (50/3)r M^s/P = M^d/P = 0.5Y - 50r a. Write the numerical $I S$ curve for the economy, expressing $Y$ as a numerical function of $G , T$, and $r$. b. Write the numerical $L M$ curve for this economy, expressing $r$ as a function of $Y$ and $M / P$. c. Solve for the equilibrium values of $Y$ and $r$, assuming $P = 1.0$ and $M = 1,200$. How do they change when $P = 2.0$ ? Check by computing $C , I$, and $G$. d. Write the numerical aggregate demand curve for this economy, expressing $Y$ as a function of $G , T$, and $M / P$.

Accepted Answer

The answer of Assume that an economy is characterized by...

Question 6

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.

Accepted Answer

A)  less than 
B)  greater than 
C)  equal to 
D)  sometimes less and sometimes greater than

Question 7

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

Accepted Answer

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

Question 8

Assume that the economy is initially in short-run equilibrium at a level of output above the natural rate. Use the IS-LM model to illustrate graphically how the levels of income and interest rates change as the economy returns to the natural rate of output in the long run.

Accepted Answer

The answer of Assume that the economy is initially in...

Question 9

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

Accepted Answer

A)  expansionary shift in the IS curve. 
B)  contractionary shift in the IS curve. 
C)  expansionary shift in the LM curve. 
D)  contractionary shift in the LM curve.

Question 10

A change in income in the IS-LM model for a fixed price

Accepted Answer

A)  represents a shift in the aggregate demand curve. 
B)  represents a movement along the aggregate demand curve. 
C)  has the same effect on the aggregate demand curve as a change in income in the IS-LM model resulting from a change in the price level. 
D)  does not represent a change in the aggregate demand curve.

Question 11

In the IS-LM model under the usual conditions 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 12

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 13

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

Accepted Answer

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

Question 14

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

Accepted Answer

A)  larger the level of government spending. 
B)  smaller the level of government spending. 
C)  greater the sensitivity of investment spending to the interest rate. 
D)  smaller the sensitivity of investment spending to the interest rate.

Question 15

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

Accepted Answer

A)  rise in the real interest rate and a fall in investment. 
B)  fall in the real interest rate and a rise in investment. 
C)  rise in both the real interest rate and investment. 
D)  fall in both the real interest rate and investment.

Question 16

The spending hypothesis suggests that the Great Depression was caused by a:

Accepted Answer

A)  leftward shift in the IS curve. 
B)  rightward shift in the IS curve. 
C)  leftward shift in the LM curve. 
D)  rightward shift in the LM curve.

Question 17

Use the IS-LM model to illustrate graphically the impact of the Pigou effect on the equilibrium level of income and interest rate during the Great Depression, when prices were falling.

Accepted Answer

The answer of Use the IS-LM model to illustrate graphically...

Question 18

Use the following to answer questions :
Exhibit: IS-LM to Aggregate Demand 
-(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

Accepted Answer

A)  P1 > P2 and M1 > M2 
B)  P1 > P2 and M1 2 
C)  P1 2 and M1 > M2 
D)  P1 2 and M1 2

Question 19

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

Accepted Answer

A)  IS; shifts to the right 
B)  IS; does not shift 
C)  LM: shifts to the right 
D)  LM; does not shift

Question 20

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.

Accepted Answer

The answer of What are the spending hypothesis and monetary...

Exam 12: Aggregate Demand Ii: Applying the Is-Lm Model

Compare the impact of a tax cut on consumption, investment, output, and interest rates in the classical model of Chapter 3 versus the IS-LM model.

The macroeconomic model may be completed by adding either the Keynesian assumption that or the classical assumption that .

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 .

The LM curve is steeper the the interest sensitivity of money demand and the the effect of income on money demand.

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate and output .

Assume that the economy is initially in short-run equilibrium at a level of output above the natural rate. Use the IS-LM model to illustrate graphically how the levels of income and interest rates change as the economy returns to the natural rate of output in the long run.

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n) :

A change in income in the IS-LM model for a fixed price

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

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

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation the nominal interest rate and the real interest rate, so that investment spending declines.

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

The spending hypothesis suggests that the Great Depression was caused by a:

Use the IS-LM model to illustrate graphically the impact of the Pigou effect on the equilibrium level of income and interest rate during the Great Depression, when prices were falling.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

A tax cut shifts the to the right, and the aggregate demand curve .

What are the spending hypothesis and monetary hypothesis? Illustrate your answer with examples.