Ch 11 Macro

If the government purchases increase, then the planned expenditure line:

shifts upward

A decrease in the marginal propensity to consume will cause the IS curve to become:

steeper

According to the theory of liquidity preference, the central bank can increase the__________ of money and ___________ the interest rate.

supply, lower

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment

The book that substantially changed macroeconomics in 1936 was:

The General Theory of Employment, Interest, and Money.

The IS curve slopes downward because a ___________ interest rate reduces ___________ and thereby income.

higher, planned investment

In order to ensure that the IS curve is downward sloping, it is assumed that the:

investment demand function is downward sloping.

An economic change that does not shift the aggregate demand curve is a change in:

price level

When M remains constant but P rises, in short run, in the usual case the interest rate _____ and output _____

rises, fals

An increase in government purchases will cause the IS curve to:

Shift to the Right

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a CUT IN TAXES of $120 billion increases equilibrium income by

$240 billion.

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an INCREASE IN GOVERNMENT PURCHASES of $120 billion increases equilibrium income by

$360 billion.

What does the Keynesian cross show?

- shows that there is one level of national income at which actual expenditure equals planned expenditure. - It shows that changes in fiscal policy have a multiplied impact on income.

Suppose that the marginal propensity to consume is 0.7. According to the Keynesian Cross model, the government-purchases multiplier is:

3.3

If the marginal propensity to consume is 0.75, then the government-purchases multiplier is:

4

Suppose that the demand for real money balances is (M / P)d = (5Y − (20r). If the point Y = 100, and r = 5 is on the LM curve, and Y = 110, then the value of r giving money market equilibrium is:

7.5

What does the Keynesian cross do?

It takes fiscal policy and planned investment as exogenous

The negative relationship between the interest rate and the level of income that gives equilibrium in the market for goods and services is called the _____ curve.

IS

An increase in consumer saving for any given level of income will shift the

IS curve down and to the left

If the marginal propensity to consume is "large," then the:

IS curve is relatively flat.

If the marginal propensity to consume is "small," then the:

IS curve is relatively steep.

What does the theory of liquidity do?

It takes the money supply and the price level as exogenous and assumes that the interest rate adjusts to equilibrate the supply and demand for real money balances.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes proposed that the Great Depression was caused by:

Low Aggregate demand

The Keynesian cross is?

a basic model of income determination.

The theory of liquidity is?

a basic model of the determination of the interest rate.

the money hypopthesis suggests that the Great Deppression was caused by

a left shift to the LM curve

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between 0 and 1

When the IS curve and the LM curve intersect, the:

both the money market and the goods market are in equilibrium.

In the Keynesian cross model, suppose that the marginal propensity to consume is 0.8 and that taxes are increased by $100. In this case, income will:

decrease by $400.

The equilibrium of the Keynesian cross shows

equality of Planned Expenditure (PE) and income in the short run

The IS curve shows the points that satisfy

equilibrium in the goods market

LM curve shows the points that satisfy

equilibrium in the money market.

when M/P rises in short run equilibrium, in the usual case the interest rate ______ and output ________

falls, rises

The LM curve slopes upward because ________ income increases the _________ of money and thereby the interest rate.

higher, demand

In the Keynesian cross model, if taxes are reduced by 100, then planned expenditure _____ for any given level of income.

increase but by less than 100

An increase in the money supply will

lower interest rates and increase the income in the short run but leaves both unchanged in the long run

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income, goods and services

Starting from a short run equilibrium greater than the natural rate of output as the economy returns to a long run equilibrium output and the price level will:

output will decrease price level will increase

A higher interest rate lowers

planned investment, and this in turn lowers national income.

If the LM is not horizontal the multiplier for the increase in government spending is _____ for an increase in government purchases using the Keynesian cross.

smaller than the multiplier

The theory of liquidity implies

that increases in the money supply lower the interest rate.

The IS-LM model combines the elements of

the Keynesian cross and the elements of the theory of liquidity preference.

A higher income raises

the demand for real money balances, and this in turn raises the interest rate.

Each point on the IS curve represents equilibrium in:

the goods market

At the intersection of the IS and LM curves,

the goods market and money market are both in equilibrium.

Which variable is determined by the IS-LM model?

the interest rate

The intersection of the IS and LM curves shows

the interest rate and income that satisfy equilibrium in both markets for a given price level.

The downward-sloping IS curve summarizes

this negative relationship between the interest rate and income.

if money demand does not depend on the interest rate then the LM curve is _____ and _____ policy has no affect on output

vertical, fiscal

Once we allow the demand for real money balances to depend on national income, the theory of liquidity. A higher income raises the demand for real money balances, and this in turn raises the interest rate. The upward-sloping LM curve summarizes this positive relationship between income and the interest rate.

yields a relationship between income and the interest rate.

Once we allow planned investment to depend on the interest rate, the Keynesian cross ?

yields a relationship between the interest rate and national income.