Question 1

An economic change that does not shift the aggregate demand curve is a change in:

Accepted Answer

A)  the money supply. 
B)  the investment function. 
C)  the price level. 
D)  taxes.

Question 2

The monetary transmission mechanism works through the effects of changes in the money supply on:

Accepted Answer

A)  the budget deficit. 
B)  investment. 
C)  government expenditures. 
D)  taxation.

Question 3

Under what condition does a liquidity trap occur?

Accepted Answer

The answer of Under what condition does a liquidity trap...

Question 4

a. An economy is initially a the natural level of output. There is an increase in government spending. Use the LS—LM model to illustrate both the short-run and long-run impact of this policy change. Be sure to label: 
i. the axes
ii. the curves 
iii. the initial equilibrium 
iv. the short-run equilibrium  
v. the terminal eqilibrium

b. Explain in words the short-run and long-run impact of the change in government spending on output and interest rates.

Accepted Answer

The answer of a. An economy is initially a the...

Question 5

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.

Accepted Answer

A)  classical; both the short and long runs. 
B)  Keynesian; both the short and long runs. 
C)  classical; the short run, whereas the Keynesian assumptions are most appropriate in the long run. 
D)  Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run.

Question 6

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

Accepted Answer

A)  large; small 
B)  small; small 
C)  small; large 
D)  large; large

Question 7

Most economists believe:

Accepted Answer

A)  the Great Depression is very likely to be repeated. 
B)  it is likely that the money supply might again fall by one-fourth, but that fiscal policy would be expansionary enough in this case to avoid a Great Depression. 
C)  it is unlikely that the money supply might fall again by one-fourth, but it is likely that fiscal policy might be so contractionary as to cause a Great Depression. 
D)  in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

Question 8

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

Accepted Answer

A)  200 and the interest rate falls by 2 percent. 
B)  100 and the interest rate falls by 1 percent. 
C)  50 and the interest rate falls by 0.5 percent. 
D)  200 and the interest rate remains unchanged.

Question 9

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

Accepted Answer

A)  monetary; high 
B)  monetary; low 
C)  fiscal; high 
D)  fiscal; low

Question 10

If money demand does not depend on income, then the ______ curve is ______.

Accepted Answer

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

Question 11

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

Accepted Answer

A)  from debtors to creditors; a smaller 
B)  from debtors to creditors; a larger 
C)  from creditors to debtors; a smaller 
D)  from creditors to debtors; a larger

Question 12

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

Accepted Answer

A)  less than half as great as 
B)  approximately equal to 
C)  more than two times as great as 
D)  more than three times as great as

Question 13

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

Accepted Answer

A)  movement along the; shift in the 
B)  shift in the; movement along the 
C)  vertical; horizontal 
D)  horizontal; vertical

Question 14

A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.

Accepted Answer

The answer of A decrease in government spending reduces output...

Question 15

Use the following to answer questions :
Exhibit: Policy Interaction 
-(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____.

Accepted Answer

A)  increase; LM2 
B)  decrease; LM2 
C)  increase; LM3 
D)  decrease; LM3

Question 16

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.

Accepted Answer

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

Question 17

An increase in the money supply shifts the ______ curve 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 18

Use the following to answer questions :
Exhibit: IS-LM Monetary Policy 
-(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

Accepted Answer

A)  r2, Y2 
B)  r3, Y2 
C)  r2, Y3 
D)  r3, Y3

Question 19

Use the IS-LM model to predict the short-run impact on the interest rate and output if the Fed pushes interest rates down at the same time that both consumption and investment fall due to a financial crisis. Illustrate your answer graphically. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium; and iv. the direction the curves shift. Explain your answer in words.

Accepted Answer

The answer of Use the IS-LM model to predict the...

Question 20

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Accepted Answer

A)  both output and the price level will increase. 
B)  output will decrease, but the price level will increase. 
C)  output will increase, but the price level will decrease. 
D)  both output and the price level will decrease.

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

An economic change that does not shift the aggregate demand curve is a change in:

The monetary transmission mechanism works through the effects of changes in the money supply on:

Under what condition does a liquidity trap occur?

Analysis of the short and long runs indicates that the assumptions are most appropriate in .

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is and f is .

Most economists believe:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) ^d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

If a liquidity trap does exist, then policy will not be effective in increasing income when interest rates reach very levels.

If money demand does not depend on income, then the curve is .

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth , and that creditors have propensity to consume than debtors.

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

A change in income in the IS-LM model resulting from a change in the price level is represented by a aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a aggregate demand curve.

A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.

If investment demand is infinite below some certain r (e.g., r) and zero above r, then the IS curve is and policy has no effect on output.

An increase in the money supply shifts the curve to the right, and the aggregate demand curve .

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

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

An economic change that does not shift the aggregate demand curve is a change in:

The monetary transmission mechanism works through the effects of changes in the money supply on:

Under what condition does a liquidity trap occur?

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

Most economists believe:

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

If money demand does not depend on income, then the ______ curve is ______.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Analysis of the short and long runs indicates that the assumptions are most appropriate in .

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is and f is .

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) ^d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

If a liquidity trap does exist, then policy will not be effective in increasing income when interest rates reach very levels.

If money demand does not depend on income, then the curve is .

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth , and that creditors have propensity to consume than debtors.

A change in income in the IS-LM model resulting from a change in the price level is represented by a aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a aggregate demand curve.

If investment demand is infinite below some certain r (e.g., r) and zero above r, then the IS curve is and policy has no effect on output.

An increase in the money supply shifts the curve to the right, and the aggregate demand curve .

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: