ch 12 econ quiz
A tax cut shifts the ______ to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift
A) IS; shifts to the right
If investment does not depend on the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal
A) IS; vertical
In the IS-LM model, changes in taxes initially affect planned expenditures through: A) consumption. B) investment. C) government spending. D) the interest rate.
A) consumption
In the IS-LM model, a decrease in the interest rate would be the result of a(n): A) increase in the money supply. B) increase in government purchases. C) decrease in taxes. D) increase in money demand.
A) increase in the money supply
The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the price level is fixed whereas in the IS-LM model it is allowed to vary.
A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment
A given increase in taxes shifts the IS curve more to the left the: A) larger the marginal propensity to consume. B) smaller the marginal propensity to consume. C) larger the government spending. D) smaller the government spending.
A) larger the marginal propensity to consume
The spending hypothesis suggests that the Great Depression was caused by a: A) leftward shift in the IS curve. B) rightward shift in the IS curve. C) leftward shift in the LM curve. D) rightward shift in the LM curve.
A) leftward shift in the IS curve
In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending. A) less than B) greater than C) equal to D) sometimes less and sometimes greater than
A) less than
If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate. A) lower; lower B) lower; higher C) no change in; lower D) no change in; higher
A) lower; lower
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase
B) decrease
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending. A) lower; raises; reduces B) higher; lowers; increases C) lower; lowers; increases D) higher; raises; reduces
A) lower; raises; reduces
One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines. A) lowers; raises B) raises; lowers C) raises; raises D) lowers; lowers
A) lowers; raises
If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level. A) price level; increase B) interest rate; decrease C) money supply; increase D) consumption function; decrease
A) price level; increase
In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls
A) rises; falls
In a closed economy, if consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is: A) Y = 400 - 0.75T - 25r + G. B) Y = 1,600 - 3T - 100r + 4G. C) Y = 400 + 0.75T - 25r - G. D) Y = 1,600 + 3T - 100r - 4G.
B) Y=1,600-3T-100r+4G
When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right. A) buy; IS B) buy; LM C) sell; IS D) sell; LM
B) buy; LM
The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services: A) directly. B) by lowering the interest rate so that investment spending increases. C) by raising the interest rate so that investment spending increases. D) by increasing government spending on goods and services.
B) by lowering the interest rate so that investment spending increases
In a closed economy, an increase in government spending raises income: A) and the interest rate in the short run, but leaves both unchanged in the long run. B) in the short run, but leaves it unchanged in the long run, while lowering investment. C) in the short run, but leaves it unchanged in the long run, while lowering consumption. D) and the interest rate in both the short and long runs.
B) in the short run, but leaves i unchanged in the long run, while lowering investment
In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out: A) prices. B) investment. C) the money supply. D) taxes.
B) investment
The monetary transmission mechanism works through the effects of changes in the money supply on: A) the budget deficit. B) investment. C) government expenditures. D) taxation.
B) investment
If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels. A) monetary; high B) monetary; low C) fiscal; high D) fiscal; low
B) monetary; low
Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: A) both output and the price level will increase. B) output will decrease, but the price level will increase. C) output will increase, but the price level will decrease. D) both output and the price level will decrease.
B) output will decrease, but the price level will increase
An increase in consumer saving for any given level of income will shift the: A) LM curve upward and to the left. B) LM curve downward and to the right. C) IS curve downward and to the left. D) IS curve upward and to the right.
C) IS curve downward and to the left
One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. A) LM; right B) LM; left C) IS; right D) IS; left
C) IS; right
An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift
C) LM: shifts to the right
An unexpected deflation can change demand by redistributing wealth from: A) creditors to debtors, thus raising consumption. B) creditors to debtors, thus lowering consumption. C) debtors to creditors, thus lowering consumption. D) debtors to creditors, thus raising consumption.
C) debtors to creditors, thus lowering consumption
In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls
C) falls; rises
A liquidity trap occurs when: A) banks have too much currency and close their doors to new customers. B) the central bank mistakenly prints too much money, generating hyperinflation. C) interest rates fall so low that monetary policy is no longer effective. D) dams and locks are built to prevent flooding.
C) interest rates fall so low that monetary policy is no longer effective
The money hypothesis suggests that the Great Depression was caused by a: A) leftward shift in the IS curve. B) rightward shift in the IS curve. C) leftward shift in the LM curve. D) rightward shift in the LM curve.
C) leftward shift in the LM curve
The increase in income in response to a fiscal expansion in the IS-LM is: A) always less than in the Keynesian-cross model. B) less than in the Keynesian-cross model unless the LM curve is vertical. C) less than in the Keynesian-cross model unless the LM curve is horizontal. D) less than in the Keynesian-cross model unless the IS curve is vertical.
C) less than in the Keynesian-cross model unless the LM curve is horizontal
Other things equal, an expected deflation can change demand by: A) lowering the demand for money, thus shifting the LM curve. B) increasing the demand for money, thus shifting the LM curve. C) raising the real interest rate for any given nominal interest rate, thus reducing desired investment. D) lowering the real interest rate for any given nominal interest rate, thus increasing desired investment.
C) raising the real interest rate for any given nominal interest rate, thus reducing desired investment
Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate. A) real; real B) nominal; nominal C) real; nominal D) nominal; real
C) real; nominal
In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income. A) buy; rises; increase B) sell; falls; decrease C) sell; rises; decrease D) buy; rises; decrease
C) sell; rises; decrease
An economic change that does not shift the aggregate demand curve is a change in: A) the money supply. B) the investment function. C) the price level. D) taxes.
C) the price level
If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.
D) 400
The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______. A) LM; right B) LM; left C) IS; right D) IS; left
D) IS; left
Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______. A) classical; both the short and long runs. B) Keynesian; both the short and long runs. C) classical; the short run, whereas the Keynesian assumptions are most appropriate in the long run. D) Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run.
D) Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run
If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level. A) increase; IS B) decrease; IS C) increase; LM D) decrease; LM
D) decrease; LM
If the demand for real money balances does not depend on the interest rate, then the LM curve: A) slopes up to the right. B) slopes down to the right. C) is horizontal. D) is vertical.
D) is vertical
An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates. A) increase; lower B) increase; raise C) lower; lower. D) lower; raise
D) lower; raise
An increase in the money supply: A) increases income and lowers the interest rate in both the short and long runs. B) increases income in both the short and long runs, but leaves the interest rate unchanged in the long run. C) lowers the interest rate in both the short and long runs, but leaves income unchanged in the long run. D) lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.
D) lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run
A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______. A) resulting from a change in monetary policy; resulting from a change in fiscal policy B) resulting from a change in fiscal policy; resulting from a change in monetary policy C) at a given price level; resulting from a change in the price level D) resulting from a change in the price level; at a given price level
D) resulting from a change in the price level; at a given price level
When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left. A) buy; IS B) buy; LM C) sell; IS D) sell; LM
D) sell; LM
The interaction of the IS curve and the LM curve together determine: A) the price level and the inflation rate. B) the interest rate and the price level. C) investment and the money supply. D) the equilibrium level of the interest rate and output
D) the equilibrium level of the interest rate and output
If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by: A) G/(1 - MPC). B) more than zero but less than G/(1 - MPC). C) G. D) zero.
D) zero