Question 1

If the money market is in equilibrium,

Accepted Answer

A) the inflation rate equals the nominal interest rate. 
B) the inflation rate equals the real interest rate. 
C) the nonmoney asset market is in equilibrium. 
D) the goods market is in equilibrium. 
A) the inflation rate equals the nominal interest rate. 
B) the inflation rate equals the real interest rate. 
C) the nonmoney asset market is in equilibrium. 
D) the goods market is in equilibrium.

Question 2

An unexpected decrease in oil prices would

Accepted Answer

A) shift the FE curve to the right. 
B) shift the IS curve to the left but leave the FE curve unaffected. 
C) shift the FE curve to the left. 
D) shift the IS curve to the right but leave the FE curve unaffected. 
A) shift the FE curve to the right. 
B) shift the IS curve to the left but leave the FE curve unaffected. 
C) shift the FE curve to the left. 
D) shift the IS curve to the right but leave the FE curve unaffected.

Question 3

An increase in government purchases reduces national saving as long as

Accepted Answer

A) it causes interest rates to fall. 
B) it causes the inflation rate to fall. 
C) households' consumption falls less than one-for-one in response. 
D) taxes are raised to pay for the spending. 
A) it causes interest rates to fall. 
B) it causes the inflation rate to fall. 
C) households' consumption falls less than one-for-one in response. 
D) taxes are raised to pay for the spending.

Question 4

If the demand for real money balances were completely insensitive to the opportunity cost of holding money,

Accepted Answer

A) the money market would never be in equilibrium. 
B) the goods market would never be in equilibrium. 
C) the LM curve would be vertical. 
D) the LM curve would be horizontal. 
A) the money market would never be in equilibrium. 
B) the goods market would never be in equilibrium. 
C) the LM curve would be vertical. 
D) the LM curve would be horizontal.

Question 5

An increase in the real interest rate will

Accepted Answer

A) increase investment demand. 
B) decrease the cost of funds for investment. 
C) cause businesses to divert funds from investment to the purchase of financial assets. 
D) reduce the federal budget deficit. 
A) increase investment demand. 
B) decrease the cost of funds for investment. 
C) cause businesses to divert funds from investment to the purchase of financial assets. 
D) reduce the federal budget deficit.

Question 6

Why did the Fed cut interest rates in late 1991?

Accepted Answer

A) To help reduce the value of the dollar 
B) To help increase the value of the dollar 
C) To stimulate the economy's recovery from the 1990-1991 recession 
D) To help fight inflation 
A) To help reduce the value of the dollar 
B) To help increase the value of the dollar 
C) To stimulate the economy's recovery from the 1990-1991 recession 
D) To help fight inflation

Question 7

At a point below the LM curve,

Accepted Answer

A) there is an excess supply of money. 
B) there is an excess supply of nonmoney assets. 
C) the real interest rate is above its equilibrium level. 
D) there is an excess supply of goods. 
A) there is an excess supply of money. 
B) there is an excess supply of nonmoney assets. 
C) the real interest rate is above its equilibrium level. 
D) there is an excess supply of goods.

Question 8

A cut in the federal income tax will cause the IS curve to

Accepted Answer

A) shift to the left and intersect the FE line at a higher real interest rate. 
B) shift to the right and intersect the FE line at a lower real interest rate. 
C) shift to the left and intersect the FE line at a lower real interest rate. 
D) shift to the right and intersect the FE line at a higher real interest rate. 
A) shift to the left and intersect the FE line at a higher real interest rate. 
B) shift to the right and intersect the FE line at a lower real interest rate. 
C) shift to the left and intersect the FE line at a lower real interest rate. 
D) shift to the right and intersect the FE line at a higher real interest rate.

Question 9

The level of full employment output

Accepted Answer

A) increases as the real rate of interest decreases. 
B) increases as the real rate of interest increases. 
C) is unaffected by the real rate of interest. 
D) is represented on the IS-LM-FE diagram by a horizontal line at the world real rate of interest. 
A) increases as the real rate of interest decreases. 
B) increases as the real rate of interest increases. 
C) is unaffected by the real rate of interest. 
D) is represented on the IS-LM-FE diagram by a horizontal line at the world real rate of interest.

Question 10

A decline in expected inflation will likely lead to

Accepted Answer

A) both GDP and interest rates rising 
B) an increase in GDP but decrease in interest rates 
C) both GDP and interest rates falling 
D) an increase in interest rates but decrease in GDP 
A) both GDP and interest rates rising 
B) an increase in GDP but decrease in interest rates 
C) both GDP and interest rates falling 
D) an increase in interest rates but decrease in GDP

Question 11

The neutrality of money refers to

Accepted Answer

A) the inability of changes in the money supply to affect the nominal interest rate, even in the long run. 
B) the inability of changes in the money supply to affect the price level, even in the long run. 
C) the fact that in the long run any percentage increase in the money supply leads to an equal percentage increase in the price level. 
D) the fact that in the long run any percentage increase in the money supply leads to an equal percentage increase in the nominal interest rate. 
A) the inability of changes in the money supply to affect the nominal interest rate, even in the long run. 
B) the inability of changes in the money supply to affect the price level, even in the long run. 
C) the fact that in the long run any percentage increase in the money supply leads to an equal percentage increase in the price level. 
D) the fact that in the long run any percentage increase in the money supply leads to an equal percentage increase in the nominal interest rate.

Question 12

The intersection of the IS curve and the FE line

Accepted Answer

A) represents money market equilbrium. 
B) determines the equilibrium level of current output and the equilibrium inflation rate. 
C) represents goods market equilibrium. 
D) determines the equilibrium real interest rate and the equilibrium inflation rate. 
A) represents money market equilbrium. 
B) determines the equilibrium level of current output and the equilibrium inflation rate. 
C) represents goods market equilibrium. 
D) determines the equilibrium real interest rate and the equilibrium inflation rate.

Question 13

When the interest sensitivity of the demand for real money balances is low,

Accepted Answer

A) the LM curve is relatively flat. 
B) the IS curve is relatively steep. 
C) the LM curve is relatively steep. 
D) investment spending will also not be sensitive to the interest rate. 
A) the LM curve is relatively flat. 
B) the IS curve is relatively steep. 
C) the LM curve is relatively steep. 
D) investment spending will also not be sensitive to the interest rate.

Exam 24: Linking the Financial System and the Economy: the Is-Lm-Fe Model

If the money market is in equilibrium,

An unexpected decrease in oil prices would

An increase in government purchases reduces national saving as long as

If the demand for real money balances were completely insensitive to the opportunity cost of holding money,

An increase in the real interest rate will

Why did the Fed cut interest rates in late 1991?

At a point below the LM curve,

A cut in the federal income tax will cause the IS curve to

The level of full employment output

A decline in expected inflation will likely lead to

The neutrality of money refers to

The intersection of the IS curve and the FE line

When the interest sensitivity of the demand for real money balances is low,

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters