Chapter 12

Question 1

The interaction of the IS curve and the LM curve together determine:

1. the price level and the inflation rate.
2. the interest rate and the price level.
3. investment and the money supply.
4. the interest rate and the level of output.

Answer 1

4

Question 2

Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁ a decrease in government spending would generate the new equilibrium combination of interest rate and income:

1. r₂, Y₂
2. r₃, Y₂
3. r₂, Y₃
4. r₃, Y₃

Answer 2

2

Question 3

Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁ an increase in government spending would generate the new equilibrium combination of interest rate and income:

1. r₂, Y₂
2. r₃, Y₂
3. r₂, Y₃
4. r₃, Y₃

Answer 3

3

Question 4

Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁ a tax cut would generate the new equilibrium combination of interest rate and income:

1. r₂, Y₂
2. r₃, Y₂
3. r₂, Y₃
4. r₃, Y₃

Answer 4

3

Question 5

In the IS–LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

1. rises; falls
2. rises; rises
3. falls; rises
4. falls; falls

Answer 5

2

Question 6

In the IS–LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

1. decrease; decrease; decrease; decrease
2. increase; increase; increase; increase
3. decrease; decrease; increase; increase
4. increase; increase; decrease; decrease

Answer 6

1

Question 7

In the IS–LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

1. increase; supply
2. increase; demand
3. decrease; supply
4. decrease; demand

Answer 7

2

Question 8

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

1. rises; falls
2. rises; rises
3. falls; rises
4. falls; falls

Answer 8

4

Question 9

If the LM curve is vertical and government spending rises by G, in the IS–LM analysis, then equilibrium income rises by:

1. G/(1 – MPC).
2. more than zero but less than G/(1 – MPC).
3. G.
4. zero.

Answer 9

4

Question 10

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

1. 100.
2. 200.
3. 300.
4. 400.

Answer 10

4

Question 11

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

1. 100.
2. 200.
3. 300.
4. 400.

Answer 11

3

Question 12

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:

1. prices.
2. investment.
3. the money supply.
4. taxes.

Answer 12

2

Question 13

The increase in income in response to a fiscal expansion in the IS–LM is:

1. always less than in the Keynesian-cross model.
2. less than in the Keynesian-cross model unless the LM curve is vertical.
3. less than in the Keynesian-cross model unless the LM curve is horizontal.
4. less than in the Keynesian-cross model unless the IS curve is vertical.

Answer 13

3

Question 14

Using the IS–LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

1. larger than the multiplier
2. the same as the multiplier
3. smaller than the multiplier
4. sometimes larger and sometimes smaller than the multiplier

Answer 14

3

Question 15

The reason that the income response to a fiscal expansion is generally less in the IS–LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

1. investment is not affected by the interest rate whereas in the IS–LM model fiscal expansion raises the interest rate and crowds out investment.
2. investment is not affected by the interest rate whereas in the IS–LM model fiscal expansion lowers the interest rate and crowds out investment.
3. investment is autonomous whereas in the IS–LM model fiscal expansion encourages higher investment, which raises the interest rate.
4. the price level is fixed whereas in the IS–LM model it is allowed to vary.

Answer 15

1

Question 16

In the IS–LM model, changes in taxes initially affect planned expenditures through:

1. consumption.
2. investment.
3. government spending.
4. the interest rate.

Answer 16

1

Question 17

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.

1. less than
2. greater than
3. equal to
4. sometimes less and sometimes greater than

Answer 17

1

Question 18

Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁ decrease in the money supply would generate the new equilibrium combination of interest rate and income:

1. r₂, Y₂
2. r₃, Y₂
3. r₂, Y₃
4. r₃, Y₃

Answer 18

1

Question 19

Based on the graph, starting from equilibrium at interest rate r₁ and income Y₁ an increase in the money supply would generate the new equilibrium combination of interest rate and income:

1. r₂, Y₂
2. r₃, Y₂
3. r₂, Y₃
4. r₃, Y₃

Answer 19

4

Question 20

If the money supply increases, then in the IS–LM analysis the ______ curve shifts to the ______.

1. LM; left
2. LM; right
3. IS; left
4. IS; right

Answer 20

2

Question 21

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

1. rises; falls
2. rises; rises
3. falls; rises
4. falls; falls

Answer 21

3

Question 22

In the IS–LM model when M rises but P remains constant, in short-run equilibrium, in the usual case the interest rate
______ and output ______.

1. rises; falls
2. rises; rises
3. falls; rises
4. falls; falls

Answer 22

3

Question 23

In the IS–LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate
______ and output ______.

1. rises; falls
2. rises; rises
3. falls; rises
4. falls; falls

Answer 23

1

Question 24

If the demand for real money balances does not depend on the interest rate, then the LM curve:

1. slopes up to the right.
2. slopes down to the right.
3. is horizontal.
4. is vertical.

Answer 24

4

Question 25

In the IS–LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate \_\_\_\_\_\_, leading to a(n) ______ in investment and income. 1. buy; rises; increase 2. sell; falls; decrease 3. sell; rises; decrease 4. buy; rises; decrease

Answer 25

3

Question 26

The monetary transmission mechanism works through the effects of changes in the money supply on: 1. the budget deficit. 2. investment. 3. government expenditures. 4. taxation.

Answer 26

2

Question 27

The monetary transmission mechanism in the IS–LM model is a process whereby an increase in the money supply increases the demand for goods and services: 1. directly. 2. by lowering the interest rate so that investment spending increases. 3. by raising the interest rate so that investment spending increases. 4. by increasing government spending on goods and services.

Answer 27

2

Question 28

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate. 1. lower; lower 2. lower; higher 3. no change in; lower 4. no change in; higher

Answer 28

1

Question 29

According to the IS–LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply. 1. increase 2. decrease 3. first increase and then decrease 4. first decrease and then increase

Answer 29

2

Question 30

According to the IS–LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply. 1. increase 2. decrease 3. first increase and then decrease 4. first decrease and then increase

Answer 30

1

Question 31

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then: 1. both consumption and investment remain unchanged. 2. consumption rises but investment falls. 3. investment rises but consumption falls. 4. both consumption and investment fall.

Answer 31

3

Question 32

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 the interest rate constant, the Federal Reserve should _____ the money supply shifting to \_\_\_\_\_. 1. increase; LM2 2. decrease; LM2 3. increase; LM3 4. decrease; LM3

Answer 32

1

Question 33

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 \_\_\_\_\_. 1. increase; LM2 2. decrease; LM2 3. increase; LM3 4. decrease; LM3

Answer 33

4

Question 34

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, and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be \_\_\_\_\_. 1. r1, Y2 2. r2, Y3 3. r3, Y3 4. r3, Y4

Answer 34

2

Question 35

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. 1. less than half as great as 2. approximately equal to 3. more than two times as great as 4. more than three times as great as

Answer 35

4

Question 36

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about: 1. zero. 2. $25 billion. 3. $75 billion. 4. $100 billion.

Answer 36

2

Question 37

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic “animal spirits”—will, within the IS–LM framework, ______ output and ______ interest rates. 1. increase; lower 2. increase; raise 3. lower; lower 4. lower; raise

Answer 37

2

Question 38

An increase in consumer saving for any given level of income will shift the: 1. LM curve upward and to the left. 2. LM curve downward and to the right. 3. IS curve downward and to the left. 4. IS curve upward and to the right.

Answer 38

3

Question 39

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS–LM framework, ______ output and ______ interest rates. 1. increase; lower 2. increase; raise 3. lower; lower. 4. lower; raise

Answer 39

4

Question 40

In the IS–LM model, a decrease in the interest rate would be the result of a(n): 1. increase in the money supply. 2. increase in government purchases. 3. decrease in taxes. 4. increase in money demand.

Answer 40

1

Question 41

In the IS–LM model, a decrease in output would be the result of a(n): 1. decrease in taxes. 2. increase in the money supply. 3. increase in money demand. 4. increase in government purchases.

Answer 41

3

Question 42

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS–LM model by shifting the ______ curve to the \_\_\_\_\_\_. 1. LM; right 2. LM; left 3. IS; right 4. IS; left

Answer 42

4

Question 43

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS–LM model by shifting the ______ curve to the \_\_\_\_\_\_. 1. LM; right 2. LM; left 3. IS; right 4. IS; left

Answer 43

3

Question 44

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS–LM model by shifting the ______ curve to the \_\_\_\_\_\_. 1. LM; right 2. LM; left 3. IS; right 4. IS; left

Answer 44

1

Question 45

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left. 1. buy; IS 2. buy; LM 3. sell; IS 4. sell; LM

Answer 45

4

Question 46

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right. 1. buy; IS 2. buy; LM 3. sell; IS 4. sell; LM

Answer 46

2

Question 47

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending. 1. lower; raises; reduces 2. higher; lowers; increases 3. lower; lowers; increases 4. higher; raises; reduces

Answer 47

1

Question 48

An economic change that does not shift the aggregate demand curve is a change in: 1. the money supply. 2. the investment function. 3. the price level. 4. taxes.

Answer 48

3

Question 49

A change in income in the IS–LM model for a fixed price 1. represents a shift in the aggregate demand curve. 2. represents a movement along the aggregate demand curve. 3. 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. 4. does not represent a change in the aggregate demand curve.

Answer 49

1

Question 50

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve \_\_\_\_\_\_. 1. IS; shifts to the right 2. IS; does not shift 3. LM: shifts to the right 4. LM; does not shift

Answer 50

3

Question 51

A tax cut shifts the ______ to the right, and the aggregate demand curve \_\_\_\_\_\_. 1. IS; shifts to the right 2. IS; does not shift 3. LM: shifts to the right 4. LM; does not shift

Answer 51

1

Question 52

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve \_\_\_\_\_\_. 1. IS; shifts to the right 2. IS; does not shift 3. LM: shifts to the right 4. LM; does not shift

Answer 52

4

Question 53

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. 1. movement along the; shift in the 2. shift in the; movement along the 3. vertical; horizontal 4. horizontal; vertical

Answer 53

1

Question 54

Based on the graph, if LM₁ shifts to LM₂ because the price level decreasesfrom P₁ to P₂ then, holding other factors constant: 1. the aggregate demand curve will shift to the right. 2. the aggregate demand curve will shift to the left. 3. this represents a movement up the aggregate demand curve. 4. this represents a movement down the aggregate demand curve.

Answer 54

4

Question 55

Based on the graph, if LM₃ shifts to LM₂ because the money supply decreases from M₃ to M₂ then, holding other factors constant: 1. the aggregate demand curve will shift to the right. 2. the aggregate demand curve will shift to the left. 3. this represents a movement up the aggregate demand curve. 4. this represents a movement down the aggregate demand curve.

Answer 55

2

Question 56

Based on the graph, which is the correct ordering of the price levels and money supplies? 1. P₁ \> P₂ and M₁ \> M₂ 2. P₁ \> P₂ and M₁ \< M₂ 3. P₁ \< P₂ and M₁ \> M₂ 4. P₁ \< P₂ and M₁ \< M₂

Answer 56

2

Question 57

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 \_\_\_\_\_\_. 1. resulting from a change in monetary policy; resulting from a change in fiscal policy 2. resulting from a change in fiscal policy; resulting from a change in monetary policy 3. at a given price level; resulting from a change in the price level 4. resulting from a change in the price level; at a given price level

Answer 57

4

Question 58

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: 1. both output and the price level will increase. 2. output will decrease, but the price level will increase. 3. output will increase, but the price level will decrease. 4. both output and the price level will decrease.

Answer 58

2

Question 59

If the short-run IS–LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will \_\_\_\_\_\_, shifting the ______ curve to the right and returning output to the natural level. 1. increase; IS 2. decrease; IS 3. increase; LM 4. decrease; LM

Answer 59

4

Question 60

If the short-run IS–LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level. 1. price level; increase 2. interest rate; decrease 3. money supply; increase 4. consumption function; decrease

Answer 60

1

Question 61

Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. 1. B; higher 2. B; lower 3. C; higher 4. C; lower

Answer 61

2

Question 62

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level. 1. B; higher 2. B; lower 3. C; higher 4. C; lower

Answer 62

3

Question 63

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that \_\_\_\_\_\_. 1. output is fixed; prices are fixed 2. prices are fixed; output is fixed 3. the interest rate is fixed; the money supply is fixed 4. prices are flexible; output varies

Answer 63

2

Question 64

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in \_\_\_\_\_\_. 1. classical; both the short and long runs. 2. Keynesian; both the short and long runs. 3. classical; the short run, whereas the Keynesian assumptions are most appropriate in the long run. 4. Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run.

Answer 64

4

Question 65

The spending hypothesis suggests that the Great Depression was caused by a: 1. leftward shift in the IS curve. 2. rightward shift in the IS curve. 3. leftward shift in the LM curve. 4. rightward shift in the LM curve.

Answer 65

1

Question 66

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except: 1. the decline in investment spending on housing because of a decline in immigration in the 1930s. 2. the decline in consumption spending caused by the stock market crash of 1929. 3. fiscal policy to reduce the budget deficit by raising taxes in 1932. 4. the 25-percent reduction in the money supply between 1929 and 1933.

Answer 66

4

Question 67

The money hypothesis suggests that the Great Depression was caused by a: 1. leftward shift in the IS curve. 2. rightward shift in the IS curve. 3. leftward shift in the LM curve. 4. rightward shift in the LM curve.

Answer 67

3

Question 68

The Great Depression in the United States: 1. probably was caused by a rightward shift in the LM curve because the price level fell more rapidly than the fall in the money supply from 1929 to 1933. 2. cannot be attributed to a fall in the money supply because the money supply did not fall. 3. probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931. 4. probably was caused by a leftward shift in the LM curve because interest rates remained high between 1929 and 1933.

Answer 68

3

Question 69

The Pigou effect: 1. suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. 2. suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more. 3. suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more. 4. is generally accepted as adequate proof that the economy must be able to correct itself.

Answer 69

2

Question 70

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve. 1. money demand; LM 2. the money supply; LM 3. consumer spending; IS 4. government spending; IS

Answer 70

3

Question 71

If real money balances enter the IS–LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: 1. only the LM curve. 2. only the IS curve. 3. both the LM and the IS curves. 4. neither the LM nor the IS curve.

Answer 71

3

Question 72

If real money balances enter the IS–LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will result in higher income and: 1. higher interest rates. 2. lower interest rates. 3. no change in interest rates. 4. either higher, lower, or unchanging interest rates.

Answer 72

4

Question 73

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services. 1. unexpected; reduce 2. unexpected; increase 3. expected; reduce 4. expected; increase

Answer 73

1

Question 74

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. 1. from debtors to creditors; a smaller 2. from debtors to creditors; a larger 3. from creditors to debtors; a smaller 4. from creditors to debtors; a larger

Answer 74

1

Question 75

An unexpected deflation can change demand by redistributing wealth from: 1. creditors to debtors, thus raising consumption. 2. creditors to debtors, thus lowering consumption. 3. debtors to creditors, thus lowering consumption. 4. debtors to creditors, thus raising consumption.

Answer 75

3

Question 76

Possible explanations put forth for the Great Depression do not include: 1. a shift in the IS curve. 2. a shift in the LM curve. 3. the debt-deflation theory. 4. the Pigou effect.

Answer 76

4

Question 77

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate. 1. real; real 2. nominal; nominal 3. real; nominal 4. nominal; real

Answer 77

3

Question 78

In the IS–LM model, starting with no expected inflation, if expected inflation becomes negative, then the: 1. IS curve shifts leftward. 2. IS curve shifts rightward. 3. LM curve shifts leftward. 4. LM curve shifts rightward.

Answer 78

1

Question 79

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. 1. lowers; raises 2. raises; lowers 3. raises; raises 4. lowers; lowers

Answer 79

1

Question 80

In the IS–LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n): 1. increase in both output and the nominal interest rate. 2. decrease in both output and the nominal interest rate. 3. increase in output and a decrease in the nominal interest rate. 4. decrease in output and an increase in the nominal interest rate.

Answer 80

2

Question 81

Other things equal, an expected deflation can change demand by: 1. lowering the demand for money, thus shifting the LM curve. 2. increasing the demand for money, thus shifting the LM curve. 3. raising the real interest rate for any given nominal interest rate, thus reducing desired investment. 4. lowering the real interest rate for any given nominal interest rate, thus increasing desired investment.

Answer 81

3

Question 82

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): 1. expansionary shift in the IS curve. 2. contractionary shift in the IS curve. 3. expansionary shift in the LM curve. 4. contractionary shift in the LM curve.

Answer 82

2

Question 83

All of the following may have contributed to the financial crisis and economic downturn of 2008–2009 except 1. high inflation. 2. low interest rates. 3. stock market volatility. 4. falling house prices.

Answer 83

1

Question 84

Most economists believe: 1. the Great Depression is very likely to be repeated. 2. 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. 3. 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. 4. 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.

Answer 84

4

Question 85

A liquidity trap occurs when: 1. banks have too much currency and close their doors to new customers. 2. the central bank mistakenly prints too much money, generating hyperinflation. 3. interest rates fall so low that monetary policy is no longer effective. 4. dams and locks are built to prevent flooding.

Answer 85

3

Question 86

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels. 1. monetary; high 2. monetary; low 3. fiscal; high 4. fiscal; low

Answer 86

2

Question 87

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent. 1. 4 2. 1 3. 0 4. –2

Answer 87

4. [-2]

Question 88

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the: 1. larger the level of government spending. 2. smaller the level of government spending. 3. greater the sensitivity of investment spending to the interest rate. 4. smaller the sensitivity of investment spending to the interest rate.

Answer 88

4

Question 89

The slope of the IS curve depends on: 1. the interest sensitivity of investment and the amount of government spending. 2. the interest sensitivity of investment and the marginal propensity to consume. 3. the interest sensitivity of investment and the tax rates. 4. tax rates and government spending.

Answer 89

2

Question 90

A given increase in taxes shifts the IS curve more to the left the: 1. larger the marginal propensity to consume. 2. smaller the marginal propensity to consume. 3. larger the government spending. 4. smaller the government spending.

Answer 90

1

Question 91

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand. 1. greater; greater 2. greater; smaller 3. smaller; smaller 4. smaller; greater

Answer 91

4

Question 92

If the demand function for money is M/P = 0.5Y – 100r, then the slope of the LM curve is: 1. 0.001. 2. 0.005. 3. 0.01. 4. 0.05.

Answer 92

2

Question 93

If the demand function for money is M/P = 0.5Y – 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the: 1. left by 100. 2. left by 200. 3. right by 100. 4. right by 200.

Answer 93

4

Question 94

Other things equal, a given change in government spending has a larger effect on demand the: 1. flatter the LM curve. 2. steeper the LM curve. 3. smaller the interest sensitivity of money demand. 4. larger the income sensitivity of money demand.

Answer 94

1

Question 95

Other things equal, a given change in government spending has a larger effect on demand the: 1. flatter the IS curve. 2. steeper the IS curve. 3. larger the interest sensitivity of expenditure demand. 4. smaller the interest sensitivity of money demand.

Answer 95

2

Question 96

Other things equal, a given change in money supply has a larger effect on demand the: 1. flatter the IS curve. 2. steeper the IS curve. 3. smaller the interest sensitivity of expenditure demand. 4. larger the income sensitivity of money demand.

Answer 96

1

Question 97

Other things equal, a given change in money supply has a larger effect on demand the 1. larger the income sensitivity of money demand. 2. smaller the income sensitivity of money demand. 3. flatter the LM curve. 4. steeper the IS curve.

Answer 97

2

Question 98

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output. 1. horizontal; fiscal 2. vertical; fiscal 3. horizontal; monetary 4. vertical; monetary

Answer 98

2

Question 99

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output. 1. vertical; monetary 2. horizontal; monetary 3. vertical; fiscal 4. horizontal; fiscal

Answer 99

1

Question 100

If money demand is infinite below some certain r (e.g., r\*) and zero above r\*, then the LM curve is ______ and ______ policy has no effect on output. 1. vertical; fiscal 2. horizontal; fiscal 3. vertical; monetary 4. horizontal; monetary

Answer 100

4

Question 101

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. 1. vertical; monetary 2. horizontal; monetary 3. vertical; fiscal 4. horizontal; fiscal

Answer 101

4

Question 102

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 \_\_\_\_\_\_. 1. large; small 2. small; small 3. small; large 4. large; large

Answer 102

3

Question 103

If the investment demand function is I = c – dr and the quantity of real money demanded is eY – fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is \_\_\_\_\_\_. 1. large; small. 2. small; also small. 3. small; large. 4. large; also large.

Answer 103

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Question 104

Those economists who believe that fiscal policy is more potent than monetary policy argue that the: 1. responsiveness of investment to the interest rate is small. 2. responsiveness of investment to the interest rate is large. 3. IS curve is nearly horizontal. 4. LM curve is nearly vertical.

Answer 104

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Question 105

Those economists who believe that monetary policy is more potent than fiscal policy argue that the: 1. responsiveness of money demand to the interest rate is large. 2. responsiveness of money demand to the interest rate is small. 3. IS curve is nearly vertical. 4. LM curve is nearly horizontal.

Answer 105

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Question 106

According to the IS–LM model, when the government increases taxes and government purchases by equal amounts: 1. income, the interest rate, consumption, and investment are unchanged. 2. income and the interest rate rise, whereas consumption and investment fall. 3. income and the interest rate fall, whereas consumption and interest rise. 4. income, the interest rate, consumption, and investment all rise.

Answer 106

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Question 107

If consumption is given by C = 200 + 0.75(Y – T) and investment is given by I = 200 – 25r, then the formula for the IS curve is: 1. Y = 400 – 0.75T – 25r + G. 2. Y = 1,600 – 3T – 100r + 4G. 3. Y = 400 + 0.75T – 25r – G. 4. Y = 1,600 + 3T – 100r – 4G.

Answer 107

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Question 108

If the IS curve is given by Y = 1,700 – 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by: 1. Y = 1,100, r = 6 percent. 2. Y = 1,200, r = 5 percent. 3. Y = 1,000, r = 5 percent. 4. Y = 1,100, r = 5 percent.

Answer 108

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Question 109

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: 1. 200 and the interest rate falls by 2 percent. 2. 100 and the interest rate falls by 1 percent. 3. 50 and the interest rate falls by 0.5 percent. 4. 200 and the interest rate remains unchanged.

Answer 109

3

Question 110

If investment does not depend on the interest rate, then the ______ curve is \_\_\_\_\_\_. 1. IS; vertical 2. IS; horizontal 3. LM; vertical 4. LM; horizontal

Answer 110

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Question 111

If money demand does not depend on income, then the ______ curve is \_\_\_\_\_\_. 1. IS; vertical 2. IS; horizontal 3. LM; vertical 4. LM; horizontal

Answer 111

4

Question 112

If money demand is extremely sensitive to the interest rate, then the ______ curve is \_\_\_\_\_\_. 1. IS; vertical 2. IS; horizontal 3. LM; vertical 4. LM; horizontal

Answer 112

4

Question 113

If the government wants to raise investment but keep output constant, it should: 1. adopt a loose monetary policy but keep fiscal policy unchanged. 2. adopt a loose monetary policy and a loose fiscal policy. 3. adopt a loose monetary policy and a tight fiscal policy. 4. keep monetary policy unchanged but adopt a tight fiscal policy.

Answer 113

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Question 114

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a: 1. rise in the real interest rate and a fall in investment. 2. fall in the real interest rate and a rise in investment. 3. rise in both the real interest rate and investment. 4. fall in both the real interest rate and investment.

Answer 114

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Question 115

An increase in the money supply: 1. increases income and lowers the interest rate in both the short and long runs. 2. increases income in both the short and long runs, but leaves the interest rate unchanged in the long run. 3. lowers the interest rate in both the short and long runs, but leaves income unchanged in the long run. 4. lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

Answer 115

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Question 116

An increase in government spending raises income: 1. and the interest rate in the short run, but leaves both unchanged in the long run. 2. in the short run, but leaves it unchanged in the long run, while lowering investment. 3. in the short run, but leaves it unchanged in the long run, while lowering consumption. 4. and the interest rate in both the short and long runs.

Answer 116

2

Question 117

An increase in taxes lowers income: 1. and the interest rate in the short run, but leaves both unchanged in the long run. 2. in the short run, but leaves it unchanged in the long run, while increasing consumption and lowering investment. 3. in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment. 4. and the interest rate in both the short and long runs.

Answer 117

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