Question 1

In the classical model,

Accepted Answer

A)  both fiscal and monetary policy will have larger impacts on income.
B)  neither fiscal nor monetary policy can influence output.
C)  monetary policy cannot influence output.
D)  fiscal policy cannot influence output.
E)  none of the above. B

Question 2

In the IS-LM model,the two variables that are affected by the interest rate are

Accepted Answer

A)  money supply and money demand.
B)  money supply and investment spending.
C)  money demand and consumption.
D)  money demand and investment spending.
E)  none of the above. D

Question 3

If the consumption function is given by C = 100 + 0.75(Y-T),then an increase of 10 units in taxes will cause the IS schedule to shift to the right by

Accepted Answer

A)  -30 units.
B)  -10 units.
C)  30 units.
D)  40 units. A

Question 4

Suppose that there is an unexpected increase in the demand for money at every level of interest rates and income.What happens to equilibrium interest rates and income as a result? Provide an IS/LM curve to illustrate.

Accepted Answer

The answer of Suppose that there is an unexpected increase...

Question 5

The IS curve becomes steeper when there is

Accepted Answer

A)  a higher marginal propensity to save.
B)  a smaller parameter measuring the interest sensitivity of investment.
C)  a lower marginal propensity to save.
D)  Both a and b
E)  Both b and c

Question 6

If Y>C+I+G but Md= Ms,then

Accepted Answer

A)  interest rates must rise and output must fall.
B)  both interest rates and output must fall.
C)  interest rates must fall and output must rise.
D)  both interest rates and output must rise.
E)  none of the above.

Question 7

Household consumption likely depends upon accumulated wealth and not just current income as it does in the basic Keynesian model examined in this chapter.How would the IS/LM model respond to a decline in housing prices,such as what occurred in the US during the 2008 global financial crisis,if consumption was a function of wealth.Provide a graph to illustrate.

Accepted Answer

The answer of Household consumption likely depends upon accumulated wealth...

Question 8

If savings becomes more interest rate elastic,what happens to the slope of the IS curve.Provide a graph to illustrate.

Accepted Answer

The answer of If savings becomes more interest rate elastic,what...

Question 9

If Md = 2,600 - 200r,the MPC = .75,G=100,and T = 100.If the central bank wants the interest rate to be r=2,then the money supply must be

Accepted Answer

A)  5.
B)  400
C)  300
D)  3,000
E)  not enough information was given.

Question 10

Along any IS curve

Accepted Answer

A)  both government spending and expectations are fixed.
B)  government spending and the price level may vary.
C)  consumption and the price level are fixed.
D)  both government spending and tax rates may vary.
E)  all of the above

Question 11

Figure 6.1

-Panel (a)in Figure 6.1 depicts

Accepted Answer

A)  low interest elasticity of money demand.
B)  high interest elasticity of money demand.
C)  no interest elasticity of money demand,which is the same as Panel (b) .
D)  None of the above

Question 12

Assuming that money demand is completely interest insensitive,the

Accepted Answer

A)  LM schedule will be horizontal.
B)  LM schedule will be vertical.
C)  IS schedule is vertical.
D)  IS schedule is horizontal.

Question 13

Keynes believed that the precautionary demand for money varied

Accepted Answer

A)  negatively with income.
B)  positively with income.
C)  negatively with the interest rate.
D)  positively with the interest rate.
E)  Both b and c

Question 14

A decline in the money stock will

Accepted Answer

A)  shift the LM schedule to the right.
B)  shift the LM schedule to the left.
C)  not have any effect on the LM schedule.
D)  shift the IS schedule downward and to the right.

Question 15

According to the Keynesian model of the money market,the supply of money

Accepted Answer

A)  depends on the interest rate.
B)  is chosen by the central bank.
C)  varies with the price level.
D)  varies with income.

Question 16

The IS curve slopes upward because

Accepted Answer

A)  as income rises,savings rise and consumption falls,decreasing output.
B)  as interest rates rise,the money supply rises,increasing output.
C)  as interest rates rise,planned investment must fall,increasing output.
D)  as income increases,money demand rises,which increases interest rates.

Question 17

If savings does not depend upon the interest rate,then

Accepted Answer

A)  the IS curve is vertical.
B)  the IS curve is horizontal.
C)  the LM curve is horizontal.
D)  the IS curve is still downward sloping.
E)  none of the above.

Question 18

If the central bank of an economy follows a policy of interest rate targeting,or maintaining a fixed interest rate,then what will happen to the slope of the LM curve? Draw a graph to illustrate.

Accepted Answer

The answer of If the central bank of an economy...

Question 19

Assume that you purchased a $1,000 perpetual bond that pays a market interest rate of 5 percent.If you attempted to sell this bond today subsequent to an increased market rate of interest of 7.5 percent,then you

Accepted Answer

A)  could only sell this bond at a capital loss.
B)  could sell this bond at a capital gain.
C)  would not be able to sell this bond.
D)  could exchange your bond yielding 5 percent for a bond yielding 7.5 percent on an even exchange basis.

Question 20

The LM curve will become steeper when

Accepted Answer

A)  there is a larger money demand increase per unit increase in income.
B)  money demand is less sensitive to the interest rate.
C)  money demand is more sensitive to the interest rate.
D)  Both a and b
E)  Both a and c

Exam 6: Keynesian System II: Money,interest,and Income