Question 1

At any point above the current LM curve, there is an

Accepted Answer

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

Question 2

For an individual LM curve, the money supply is assumed to

Accepted Answer

A)  be constant. 
B)  grow at a rate equal to the interest rate. 
C)  grow at a rate equal to the growth rate in income. 
D)  grow at a rate equal to the marginal propensity to consume. 
A)  be constant. 
B)  grow at a rate equal to the interest rate. 
C)  grow at a rate equal to the growth rate in income. 
D)  grow at a rate equal to the marginal propensity to consume.

Question 3

The slope of the LM curve will be flatter the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

Accepted Answer

A)  less; less 
B)  less; greater 
C)  greater; less 
D)  greater; greater 
A)  less; less 
B)  less; greater 
C)  greater; less 
D)  greater; greater

Question 4

Under the Classical assumptions, an increase in government spending causes

Accepted Answer

A)  income to rise. 
B)  income to fall. 
C)  interest rates to rise. 
D)  interest rates to fall. 
A)  income to rise. 
B)  income to fall. 
C)  interest rates to rise. 
D)  interest rates to fall.

Question 5

In the complete algebraic formulation of ISLM,

Accepted Answer

A)  the government spending multiplier is greater than the tax mulitplier as long as b <1. 
B)  the government spending mulitplier is less than the tax multiplier as long as b<1. 
C)  monetary policy is always more powerful than fiscal policy. 
D)  fiscal policy is always more powerful than monetary policy. 
A)  the government spending multiplier is greater than the tax mulitplier as long as b <1. 
B)  the government spending mulitplier is less than the tax multiplier as long as b<1. 
C)  monetary policy is always more powerful than fiscal policy. 
D)  fiscal policy is always more powerful than monetary policy.

Question 6

Which of the following is an equilibrium condition in the ISLM model?

Accepted Answer

A)  Labor demand = labor supply 
B)  Actual saving = desired saving 
C)  Government spending = taxation 
D)  Money supply = money demand 
A)  Labor demand = labor supply 
B)  Actual saving = desired saving 
C)  Government spending = taxation 
D)  Money supply = money demand

Question 7

Crowding out would not occur if the

Accepted Answer

A)  IS curve is horizontal. 
B)  IS curve is vertical. 
C)  LM curve is horizontal. 
D)  LM curve is vertical 
A)  IS curve is horizontal. 
B)  IS curve is vertical. 
C)  LM curve is horizontal. 
D)  LM curve is vertical

Question 8

An increase 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 9

At any point above 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 10

A higher price level causes us to

Accepted Answer

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

Question 11

Starting from equilibrium and using the ISLM framework, a decrease in investment leads to

Accepted Answer

A)  lower interest rates and higher income. 
B)  higher interest rates and higher income. 
C)  lower interest rates and lower income. 
D)  higher interest rates and lower income. 
A)  lower interest rates and higher income. 
B)  higher interest rates and higher income. 
C)  lower interest rates and lower income. 
D)  higher interest rates and lower income.

Question 12

Which of the following influences the slope of the LM curve?

Accepted Answer

A)  The interest-sensitivity of money demand 
B)  The interest-sensitivity of investment 
C)  The interest-sensitivity of government spending 
D)  The interest-sensitivity of saving 
A)  The interest-sensitivity of money demand 
B)  The interest-sensitivity of investment 
C)  The interest-sensitivity of government spending 
D)  The interest-sensitivity of saving

Question 13

Starting from equilibrium and using the ISLM framework, an increase in investment leads to

Accepted Answer

A)  lower interest rates and higher income. 
B)  higher interest rates and higher income. 
C)  lower interest rates and lower income. 
D)  higher interest rates and lower income. 
A)  lower interest rates and higher income. 
B)  higher interest rates and higher income. 
C)  lower interest rates and lower income. 
D)  higher interest rates and lower income.

Question 14

A weakness of the simple Keynesian model is that it does not recognize that because the transactions demand for money __________ as income increases, the interest rate __________ as income rises.

Accepted Answer

A)  increases; increases 
B)  increases; decreases 
C)  decreases; increases 
D)  decreases; decreases 
A)  increases; increases 
B)  increases; decreases 
C)  decreases; increases 
D)  decreases; decreases

Question 15

The LM curve shows a series of income-interest rate combinations at which there is equilibrium in the

Accepted Answer

A)  bond market. 
B)  goods market. 
C)  saving-investment market. 
D)  money market. 
A)  bond market. 
B)  goods market. 
C)  saving-investment market. 
D)  money market.

Question 16

The slope of the IS curve will be flatter the __________ is the sensitivity of investment to a unit change in the interest rate and the __________ is marginal propensity to save.

Accepted Answer

A)  greater; larger 
B)  greater; smaller 
C)  less; larger 
D)  less; smaller 
A)  greater; larger 
B)  greater; smaller 
C)  less; larger 
D)  less; smaller

Question 17

The slope of the LM is not influenced by

Accepted Answer

A)  the gap between money demand and supply. 
B)  the interest rate sensitivity of money supply. 
C)  the interest rate sensitivity of money demand. 
D)  The slope of the LM curve is influenced by all of the above. 
A)  the gap between money demand and supply. 
B)  the interest rate sensitivity of money supply. 
C)  the interest rate sensitivity of money demand. 
D)  The slope of the LM curve is influenced by all of the above.

Question 18

Suppose the marginal propensity to consume is 0.8. A $20 billion increase in government spending shifts the IS curve

Accepted Answer

A)  to the right by $100 billion. 
B)  to the left by $20 billion. 
C)  to the left by $16 billion. 
D)  to the right by $2.5 billion. 
A)  to the right by $100 billion. 
B)  to the left by $20 billion. 
C)  to the left by $16 billion. 
D)  to the right by $2.5 billion.

Question 19

"A lower price level may lower the interest rate, but investment demand may not respond to this." This is a statement a __________ economist might make as an explanation of why the economy __________ pull 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 20

Along an LM curve at higher income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

Accepted Answer

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

Exam 24: The ISLM World

At any point above the current LM curve, there is an

For an individual LM curve, the money supply is assumed to

The slope of the LM curve will be flatter the __________ is the income-sensitivity of the demand for money and the __________ is the interest-sensitivity of the demand for money.

Under the Classical assumptions, an increase in government spending causes

In the complete algebraic formulation of ISLM,

Which of the following is an equilibrium condition in the ISLM model?

Crowding out would not occur if the

An increase in the interest rate causes

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

A higher price level causes us to

Starting from equilibrium and using the ISLM framework, a decrease in investment leads to

Which of the following influences the slope of the LM curve?

Starting from equilibrium and using the ISLM framework, an increase in investment leads to

A weakness of the simple Keynesian model is that it does not recognize that because the transactions demand for money __________ as income increases, the interest rate __________ as income rises.

The LM curve shows a series of income-interest rate combinations at which there is equilibrium in the

The slope of the IS curve will be flatter the __________ is the sensitivity of investment to a unit change in the interest rate and the __________ is marginal propensity to save.

The slope of the LM is not influenced by

Suppose the marginal propensity to consume is 0.8. A $20 billion increase in government spending shifts the IS curve

"A lower price level may lower the interest rate, but investment demand may not respond to this." This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession.

Along an LM curve at higher income levels the transactions demand for money is __________, so the interest rate must be __________ to equate the demand to the fixed supply of money.

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 slope of the LM curve will be flatter the is the income-sensitivity of the demand for money and the is the interest-sensitivity of the demand for money.

A weakness of the simple Keynesian model is that it does not recognize that because the transactions demand for money as income increases, the interest rate as income rises.

The slope of the IS curve will be flatter the is the sensitivity of investment to a unit change in the interest rate and the is marginal propensity to save.

"A lower price level may lower the interest rate, but investment demand may not respond to this." This is a statement a economist might make as an explanation of why the economy pull out of a recession.

Along an LM curve at higher income levels the transactions demand for money is , so the interest rate must be to equate the demand to the fixed supply of money.