Test 3pt1

Question 1

The IS curve represents equilibrium in the _______ market.

The LM curve represents ______ market equilibrium.

The intersection determines the unique combination of __&__that satisfies equilibrium in BOTH markets.

Answer 1

goods
money

Y and r

Question 2

An increase in government purchases

r increases; I decreases so this means that the final increase in Y is smaller than

Answer 2

1/1-MPC

Question 3

A tax cut

Because consumers save (1-MPC) of the tax cut, the initial boost in spending is smaller for change in T than for an equal change in G

and the IS curve shifts by

Answer 3

-MPC/1-MPC

Question 4

monetary & fiscal policy variables (M, G and T ) are __________

Monetary policymakers may adjust M in response to changes in fiscal policy, or vice versa.
Such interaction may alter the impact of the ___________.

Answer 4

exogenous (FIXED)
original policy change

Question 5

Suppose Congress increases G.
Possible Fed responses: (3)

-In each case, the effects of the change in G are different.

Answer 5

1. hold M constant
2. hold r constant
3. hold Y constant

Question 6

hold M constant

• If Congress raises G, the IS curve shifts ______
• If Fed holds M constant, then LM curve ….

causing:
R to ____ & Y to _____

Answer 6

right
doesn’t shift

both increase

Question 7

hold r constant

• If Congress raises G, the IS curve shifts _____
• To keep r constant, Fed ______ M to shift LM curve _____.

causing:
R to ____ & Y to _____

Answer 7

right
increases; right

R increase when IS shifts right BUT then go bck to the original when LM shifts right.

Y increases 2 times (IS & LM shifts)

Question 8

hold Y constant

• If Congress raises G, the IS curve shifts _____
• To keep Y constant, Fed ____ M to shift LM curve ____.

causing:
R to ____ & Y to _____

Answer 8

right
reduces; left

r incease 2 times (IS & LM shifts)

Y increases (IS) den goes bck to original (LM)

Question 9

exogenous changes in the demand for goods & services.

ex:
1. stock market boom or crash
2. change in business or consumer confidence or expectations

Answer 9

IS shocks

Question 10

exogenous changes in the demand for money.

ex:
1. a wave of credit card fraud increases demand for money
more
2. ATMs or the Internet reduce money demand

Answer 10

LM shocks

Question 11

Why does the Fed target interest rates instead of the money supply?

Answer 11

1. easier to measure than the MS
2. LM shocks are more prevalent than IS shocks. (then targeting the IR stabilizes income better than targeting the money supply.)