Exam 25: Money and Economic Stability in the ISLM World

Monetary policy has no effect on equilibrium income when the

Real economic activity at full employment is unaffected by changes in investment spending when

The quantity of money demanded increases at every combination of GDP and interest rate. If the Fed holds to an unchanged interest rate target, the interest rate __________ and GDP __________.

If investment spending is interest-sensitive and highly unstable, the Federal Reserve could minimize fluctuations in income by targeting

The quantity of money demanded decreases at every combination of GDP and interest rate. If the Fed holds to an unchanged money supply target, the interest rate __________ and GDP __________.

Fiscal policy is most effective when

The quantity of money demanded suddenly increases at every combination of GDP and interest rate. If the Fed holds to an unchanged money supply target, the interest rate __________ and GDP __________.

When the economy is at full employment __________ interest rates are __________ by an expansionary monetary policy if inflationary expectations are generated.

In a liquidity trap, expansionary monetary policy has __________ effect on output, and expansionary fiscal policy has __________ effect on output.

A relatively steep LM curve implies that wide fluctuations in the goods sector cause

With an upward sloping LM curve, a rising interest rate __________ money demand, so that a contractionary monetary policy is __________ than in the case of a vertical LM curve.

The economy tends to be less stable with a __________ LM curve causing interest rates to be rather __________ to shifts in the IS curve.

If we are in a horizontal region of the money demand curve, expansionary monetary policy has __________ effect on output and expansionary fiscal policy has __________ effect on output.

A vertical LM curve means that

In the IS-LM model, the expenditure multiplier is [1/(1-b)] when the

With velocity constant, an increase in the money supply multiplied by velocity yields the increase in equilibrium

"A drop in the money supply lowered output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

The expenditure multiplier is smallest when the

The amount of investment demand at each interest rate suddenly falls. If the Fed holds to an unchanged money supply target, the change in GDP is __________ if it had held to an unchanged interest rate target.

"Complete" crowding out of fiscal policy occurs when the