Question 1

An increase in government spending will cause the

Accepted Answer

A)  LM curve to shift to the right. 
B)  LM curve to shift to the left. 
C)  IS curve to shift to the right. 
D)  IS curve to shift to the left. 
A)  LM curve to shift to the right. 
B)  LM curve to shift to the left. 
C)  IS curve to shift to the right. 
D)  IS curve to shift to the left.

Question 2

When the economy is in the liquidity trap,

Accepted Answer

A)  velocity is constant. 
B)  monetary policy is impotent. 
C)  fiscal policy is impotent. 
D)  income is zero 
A)  velocity is constant. 
B)  monetary policy is impotent. 
C)  fiscal policy is impotent. 
D)  income is zero

Question 3

Which of the following will change the position of the IS curve?

Accepted Answer

A)  An increase planned investment spending 
B)  An increase in interest rates 
C)  An increase in money demand 
D)  An increase in the money supply 
A)  An increase planned investment spending 
B)  An increase in interest rates 
C)  An increase in money demand 
D)  An increase in the money supply

Question 4

Suppose the marginal propensity to consume is 0.75. A $150 billion increase in government spending shifts the IS curve

Accepted Answer

A)  to the right by $50 billion. 
B)  to the left by $50 billion. 
C)  to the left by $600 billion. 
D)  to the right by $600 billion. 
A)  to the right by $50 billion. 
B)  to the left by $50 billion. 
C)  to the left by $600 billion. 
D)  to the right by $600 billion.

Question 5

The IS curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

Accepted Answer

A)  an increase; money 
B)  an increase; investment 
C)  a decrease; money 
D)  a decrease; investment 
A)  an increase; money 
B)  an increase; investment 
C)  a decrease; money 
D)  a decrease; investment

Question 6

A lower price level causes us to

Accepted Answer

A)  move up along the aggregate demand curve. 
B)  move down along the aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left. 
A)  move up along the aggregate demand curve. 
B)  move down along the aggregate demand curve. 
C)  shift the aggregate demand curve to the right. 
D)  shift the aggregate demand curve to the left.

Question 7

The ISLM model can be used to derive

Accepted Answer

A)  aggregate demand. 
B)  aggregate supply. 
C)  the money multiplier. 
D)  the long-run economic growth rate. 
A)  aggregate demand. 
B)  aggregate supply. 
C)  the money multiplier. 
D)  the long-run economic growth rate.

Question 8

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be lower to equal the smaller level of investment.

Accepted Answer

A)  decline; lower 
B)  decline; higher 
C)  increase; lower 
D)  increase; higher 
A)  decline; lower 
B)  decline; higher 
C)  increase; lower 
D)  increase; higher

Question 9

The greater the marginal propensity to consume, the

Accepted Answer

A)  flatter the IS curve will be. 
B)  steeper the IS curve will be. 
C)  flatter the LM curve will be. 
D)  steeper the LM curve will be. 
A)  flatter the IS curve will be. 
B)  steeper the IS curve will be. 
C)  flatter the LM curve will be. 
D)  steeper the LM curve will be.

Question 10

A decrease in the interest rate causes

Accepted Answer

A)  movement up the IS curve. 
B)  movement down the LM curve. 
C)  the IS curve to shift to the left. 
D)  the LM curve to shift to the right. 
A)  movement up the IS curve. 
B)  movement down the LM curve. 
C)  the IS curve to shift to the left. 
D)  the LM curve to shift to the right.

Question 11

At any point below the current IS curve, there is an

Accepted Answer

A)  excess demand for goods. 
B)  excess supply of goods. 
C)  excess demand for money. 
D)  excess supply of money. 
A)  excess demand for goods. 
B)  excess supply of goods. 
C)  excess demand for money. 
D)  excess supply of money.

Question 12

An increase in money demand will shift the

Accepted Answer

A)  IS curve to the left. 
B)  IS curve to the right. 
C)  LM curve to the left. 
D)  LM curve to the right. 
A)  IS curve to the left. 
B)  IS curve to the right. 
C)  LM curve to the left. 
D)  LM curve to the right.

Question 13

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to a decrease in GDP.

Accepted Answer

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

Question 14

"Even if there is a liquidity trap or interest-insensitive investment, a falling price level will increase the real money supply and real wealth, and this impacts consumption." This is a statement a __________ economist might make as an explanation of why the economy __________ pull itself out of a recession.

Accepted Answer

A)  Classical; will 
B)  Classical; may not be able to 
C)  Keynesian; will 
D)  Keynesian; may not be able to 
A)  Classical; will 
B)  Classical; may not be able to 
C)  Keynesian; will 
D)  Keynesian; may not be able to

Question 15

Monetary policy will be most effective when

Accepted Answer

A)  the IS curve is flat and the LM curve is flat. 
B)  the IS curve is steep and the LM curve is flat. 
C)  the IS curve is flat and the LM curve is steep. 
D)  the IS curve is steep and the LM curve is steep. 
A)  the IS curve is flat and the LM curve is flat. 
B)  the IS curve is steep and the LM curve is flat. 
C)  the IS curve is flat and the LM curve is steep. 
D)  the IS curve is steep and the LM curve is steep.

Question 16

The LM curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

Accepted Answer

A)  an increase; money 
B)  an increase; investment 
C)  a decrease; money 
D)  a decrease; investment 
A)  an increase; money 
B)  an increase; investment 
C)  a decrease; money 
D)  a decrease; investment

Question 17

In the ISLM framework, a rising price level causes

Accepted Answer

A)  the equilibrium interest rate to rise. 
B)  the equilibrium level of income to fall. 
C)  desired saving to rise. 
D)  the LM curve to shift to the right. 
A)  the equilibrium interest rate to rise. 
B)  the equilibrium level of income to fall. 
C)  desired saving to rise. 
D)  the LM curve to shift to the right.

Question 18

Crowding out occurs when

Accepted Answer

A)  investment increases as government spending falls. 
B)  investment increases when government spending rises. 
C)  investment decreases when government spending falls. 
D)  investment decreases when government spending rises. 
A)  investment increases as government spending falls. 
B)  investment increases when government spending rises. 
C)  investment decreases when government spending falls. 
D)  investment decreases when government spending rises.

Question 19

Any increase in autonomous spending will

Accepted Answer

A)  shift the IS curve to the left. 
B)  shift the IS curve to the right. 
C)  cause a movement down along an IS curve. 
D)  cause a movement up along an IS curve. 
A)  shift the IS curve to the left. 
B)  shift the IS curve to the right. 
C)  cause a movement down along an IS curve. 
D)  cause a movement up along an IS curve.

Question 20

Which of the following is false? Critics of the ISLM framework have stated that

Accepted Answer

A)  there is no linkage between flow and stock concepts. 
B)  the interest rate is the only mechanism through which monetary policy operates. 
C)  money is not a substitute for physical assets. 
D)  velocity is assumed to be constant. 
A)  there is no linkage between flow and stock concepts. 
B)  the interest rate is the only mechanism through which monetary policy operates. 
C)  money is not a substitute for physical assets. 
D)  velocity is assumed to be constant.

Exam 24: The ISLM World

An increase in government spending will cause the

When the economy is in the liquidity trap,

Which of the following will change the position of the IS curve?

Suppose the marginal propensity to consume is 0.75. A $150 billion increase in government spending shifts the IS curve

The IS curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

A lower price level causes us to

The ISLM model can be used to derive

Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be lower to equal the smaller level of investment.

The greater the marginal propensity to consume, the

A decrease in the interest rate causes

At any point below the current IS curve, there is an

An increase in money demand will shift the

The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to a decrease in GDP.

Monetary policy will be most effective when

The LM curve becomes steeper if there is __________ in the interest-sensitivity of __________ demand.

In the ISLM framework, a rising price level causes

Crowding out occurs when

Any increase in autonomous spending will

Which of the following is false? Critics of the ISLM framework have stated that

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

The IS curve becomes steeper if there is in the interest-sensitivity of demand.

Along an IS curve as interest rates , income must be so that saving, which is a positive function of income, can be lower to equal the smaller level of investment.

The IS curve has a positive slope because a(n) in the interest rate leads to a(n) in desired investment and this leads to a decrease in GDP.

The LM curve becomes steeper if there is in the interest-sensitivity of demand.