Question 1

If velocity is constant and equal to 5, a $20 billion shift of the LM curve to the right will be produced by a __________ in the money supply.

Accepted Answer

A)  $100 billion increase 
B)  $100 billion decrease 
C)  $4 billion increase 
D)  $4 billion decrease 
A)  $100 billion increase 
B)  $100 billion decrease 
C)  $4 billion increase 
D)  $4 billion decrease

Question 2

Suppose the IS curve shifts back and forth. With a flat LM curve you get __________ variability in the output and __________ variability in the interest rate than you get with a steep LM curve.

Accepted Answer

A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less 
A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less

Question 3

Keynesians believe in a relatively stable __________ curve, and thus recommend a monetary policy targeting the __________.

Accepted Answer

A)  IS; money supply 
B)  IS; interest rate 
C)  LM; money supply 
D)  LM; interest rate 
A)  IS; money supply 
B)  IS; interest rate 
C)  LM; money supply 
D)  LM; interest rate

Question 4

A rise in the money supply __________ the natural rate of interest.

Accepted Answer

A)  lowers 
B)  raises 
C)  has no effect on 
D)  has an uncertain effect on 
A)  lowers 
B)  raises 
C)  has no effect on 
D)  has an uncertain effect on

Question 5

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 __________.

Accepted Answer

A)  rises; falls 
B)  rises; remains unchanged 
C)  remains unchanged; remains unchanged 
D)  remains unchanged; falls 
A)  rises; falls 
B)  rises; remains unchanged 
C)  remains unchanged; remains unchanged 
D)  remains unchanged; falls

Question 6

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

Accepted Answer

A)  wide fluctuations in real output. 
B)  wide fluctuations in the price level. 
C)  wide fluctuations in the interest rate. 
D)  crowding out of private investment. 
A)  wide fluctuations in real output. 
B)  wide fluctuations in the price level. 
C)  wide fluctuations in the interest rate. 
D)  crowding out of private investment.

Question 7

An increase in autonomous spending is sure to reduce the real money supply when

Accepted Answer

A)  the economy is in the liquidity trap. 
B)  the IS curve is vertical. 
C)  the economy is at full employment. 
D)  velocity is constant. 
A)  the economy is in the liquidity trap. 
B)  the IS curve is vertical. 
C)  the economy is at full employment. 
D)  velocity is constant.

Question 8

"If the money supply rises by $1 billion, GDP will rise until it alone increases the quantity of money demanded by $1 billion." This describes the situation when

Accepted Answer

A)  an IS curve shifts against a horizontal LM curve. 
B)  an IS curve shifts against a vertical LM curve. 
C)  a vertical LM curve shifts against an IS curve. 
D)  a horizontal LM curve shifts against an IS curve. 
A)  an IS curve shifts against a horizontal LM curve. 
B)  an IS curve shifts against a vertical LM curve. 
C)  a vertical LM curve shifts against an IS curve. 
D)  a horizontal LM curve shifts against an IS curve.

Question 9

If velocity is constant and equal to 2, a $10 billion shift of the LM curve to the left will be produced by a __________ in the money supply.

Accepted Answer

A)  $5 billion increase 
B)  $5 billion decrease 
C)  $20 billion increase 
D)  $20 billion decrease 
A)  $5 billion increase 
B)  $5 billion decrease 
C)  $20 billion increase 
D)  $20 billion decrease

Question 10

If investment is interest-insensitive,

Accepted Answer

A)  monetary policy has no impact on equilibrium income. 
B)  monetary policy has no impact on the equilibrium interest rate. 
C)  fiscal policy has no impact on equilibrium income. 
D)  fiscal policy has no impact on the equilibrium interest rate. 
A)  monetary policy has no impact on equilibrium income. 
B)  monetary policy has no impact on the equilibrium interest rate. 
C)  fiscal policy has no impact on equilibrium income. 
D)  fiscal policy has no impact on the equilibrium interest rate.

Question 11

If you believe that the LM curve is vertical, what type of policy would you recommend to stimulate the economy?

Accepted Answer

A)  An increase in government spending 
B)  A reduction in government spending 
C)  An increase in the money supply 
D)  A reduction in the interest rate 
A)  An increase in government spending 
B)  A reduction in government spending 
C)  An increase in the money supply 
D)  A reduction in the interest rate

Question 12

Suppose the IS curve shifts back and forth. With a steep LM curve you get __________ variability in the interest rate and __________ variability in output than you get with a flat LM curve.

Accepted Answer

A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less 
A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less

Question 13

When the economy is in the liquidity trap, the

Accepted Answer

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

Question 14

A rise in government expenditure __________ the natural rate of interest.

Accepted Answer

A)  lowers 
B)  raises 
C)  has no effect on 
D)  has an uncertain effect on 
A)  lowers 
B)  raises 
C)  has no effect on 
D)  has an uncertain effect on

Question 15

If the LM function is vertical, then __________ is constant.

Accepted Answer

A)  the price level 
B)  the interest rate 
C)  velocity 
D)  investment 
A)  the price level 
B)  the interest rate 
C)  velocity 
D)  investment

Question 16

A horizontal LM curve implies that the expenditure multiplier, when compared with the simple Keynesian expenditure multiplier, is

Accepted Answer

A)  smaller. 
B)  larger. 
C)  equal. 
D)  equal to the inverse of the simple multiplier. 
A)  smaller. 
B)  larger. 
C)  equal. 
D)  equal to the inverse of the simple multiplier.

Question 17

Fiscal policy is impotent when the LM curve is

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  downward-sloping. 
D)  horizontal or downward-sloping. 
A)  vertical. 
B)  horizontal. 
C)  downward-sloping. 
D)  horizontal or downward-sloping.

Question 18

If investment becomes more interest-sensitive,

Accepted Answer

A)  monetary policy will have a smaller impact on the equilibrium interest rate. 
B)  monetary policy will have a greater impact on equilibrium income. 
C)  fiscal policy will have a smaller impact on equilibrium income. 
D)  fiscal policy will have a larger impact on the equilibrium interest rate. 
A)  monetary policy will have a smaller impact on the equilibrium interest rate. 
B)  monetary policy will have a greater impact on equilibrium income. 
C)  fiscal policy will have a smaller impact on equilibrium income. 
D)  fiscal policy will have a larger impact on the equilibrium interest rate.

Question 19

Most economists believe the LM curve to be

Accepted Answer

A)  horizontal most of the time. 
B)  upward-sloping. 
C)  vertical. 
D)  downward-sloping. 
A)  horizontal most of the time. 
B)  upward-sloping. 
C)  vertical. 
D)  downward-sloping.

Question 20

Fluctuating interest rates tend to stabilize real output when the

Accepted Answer

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

Exam 25: Money and Economic Stability in the ISLM World

If velocity is constant and equal to 5, a $20 billion shift of the LM curve to the right will be produced by a __________ in the money supply.

Suppose the IS curve shifts back and forth. With a flat LM curve you get __________ variability in the output and __________ variability in the interest rate than you get with a steep LM curve.

Keynesians believe in a relatively stable __________ curve, and thus recommend a monetary policy targeting the __________.

A rise in the money supply __________ the natural rate of interest.

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 __________.

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

An increase in autonomous spending is sure to reduce the real money supply when

"If the money supply rises by $1 billion, GDP will rise until it alone increases the quantity of money demanded by $1 billion." This describes the situation when

If velocity is constant and equal to 2, a $10 billion shift of the LM curve to the left will be produced by a __________ in the money supply.

If investment is interest-insensitive,

If you believe that the LM curve is vertical, what type of policy would you recommend to stimulate the economy?

Suppose the IS curve shifts back and forth. With a steep LM curve you get __________ variability in the interest rate and __________ variability in output than you get with a flat LM curve.

When the economy is in the liquidity trap, the

A rise in government expenditure __________ the natural rate of interest.

If the LM function is vertical, then __________ is constant.

A horizontal LM curve implies that the expenditure multiplier, when compared with the simple Keynesian expenditure multiplier, is

Fiscal policy is impotent when the LM curve is

If investment becomes more interest-sensitive,

Most economists believe the LM curve to be

Fluctuating interest rates tend to stabilize real output when the

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

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

Suppose the IS curve shifts back and forth. With a flat LM curve you get variability in the output and variability in the interest rate than you get with a steep LM curve.

Keynesians believe in a relatively stable curve, and thus recommend a monetary policy targeting the .

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 .

Suppose the IS curve shifts back and forth. With a steep LM curve you get variability in the interest rate and variability in output than you get with a flat LM curve.