Exam 26: The ISLM Model

Macroeconomic equilibrium requires

Using the ISLM model,explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate.What is this effect called?

If the ________ curve is relatively more unstable than the ________ curve,a money supply target is preferred.

If the price level increases,everything else held constant,the ________ curve shifts to the ________.

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

In the long-run ISLM model and with everything else held constant,the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate.

A decline in the money supply shifts the LM curve to the left,causing the interest rate to ________ and output to ________,everything else held constant.

A decrease in the quantity of money supplied shifts the money supply curve to the ________,and the LM curve to the ________,everything else held constant.

Everything else held constant,a monetary expansion is characterized by ________ output and ________ interest rates.

If the Federal Reserve conducts open market ________,the money supply ________,shifting the LM curve to the left,everything else held constant.

In the long-run ISLM model and with everything else held constant,as long as the level of output ________ the natural rate level,the price level will continue to ________,shifting the LM curve to the ________,until finally output is back at the natural rate level.

As interest rates rise,the opportunity cost of holding money ________ and the demand for money ________.

If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.

Everything else held constant,a monetary contraction is characterized by ________ output and ________ interest rates.

If the economy is on the LM curve,but is to the left of the IS curve,aggregate output will ________ and the interest rate will ________.

Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

If the economy is on the LM curve,but is to the right of the IS curve,aggregate output will ________ and the interest rate will ________.

If an economy experiences high interest rates and high unemployment,the ISLM framework predicts that ________ policy has been too ________.

Using the ISLM model,show graphically and explain the effects of a monetary contraction.What is the effect on the equilibrium interest rate and level of output?