Econ Ch.4 Multiple Choice

If spending is NOT responsive to changes in the interest rate, then the A)IS curve is vertical. B)IS and LM curves are vertical. C)LM curve is vertical. D)IS curve is vertical and the LM curve is horizontal.

A)IS curve is vertical.

Suppose the demand for money becomes less sensitive to changes in the interest rate. In moving along an LM curve, an increase in income must be accompanied by a ________ change in the interest rate than before, meaning that the LM curve has become ________. A)greater, steeper B)greater, flatter C)smaller, flatter D)smaller, steeper

A)greater, steeper

"Crowding-out" occurs in the IS-LM model as rising government spending requires a ________ in the interestrate in order to ________ the demand for money at the new equilibrium, thus ________ planned private investment. A)rise, keep constant, lowering B)fall, raise, lowering C)rise, raise, lowering D)rise, lower, raising E)fall, keep constant, raising

A)rise, keep constant, lowering

If there is unplanned inventory accumulation there is excess A)supply of commodities. B)demand for commodities. C)demand for bonds. D)supply of bonds.

A)supply of commodities.

Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money supply by $100 billion. We definitely know that A)the interest rate will rise. B)the interest rate will fall. C)equilibrium GDP will fall. D)equilibrium GDP will rise.

A)the interest rate will rise.

Which variable is assumed to remain exogenous in all the models constructed in Chapters 3 and 4? A)the price level B)autonomous consumption C)the money supply D)the interest rate E)the equilibrium GDP

A)the price level

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending shifts the ________ by a horizontal distance equal to the change in government spending ________. A)LM curve to the right, divided by the Chapter 3 multiplier B)IS curve to the right, times the Chapter 3 multiplier C)LM curve to the right, divided by the interest rate at the initial equilibrium D)IS curve to the right, divided by the Chapter 3 multiplier E)IS curve to the left, times the interest rate at the initial equilibrium

B)IS curve to the right, times the Chapter 3 multiplier

When the demand for money becomes less responsive to changes in income, the LM curve becomes ________and it also shifts to the ________. A)steeper, left B)flatter, right C)flatter, left D)steeper, right

B)flatter, right

In Figure 4-6 above, with IS0 shifting to IS1 against the upward-sloping LM curve, crowding-out is the result that A)income stays at YO3. B)income rises to Y2 instead of to Y1. C)income rises to Y1 instead of to Y2. D)income rises to Y1 instead of staying at YO3.

B)income rises to Y2 instead of to Y1.

From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the newIS-LM equilibrium we have some combination of a ________ income and a ________ interest rate. A)higher, lower B)lower, higher C)higher, higher D)lower, lower

B)lower, higher

When the marginal propensity to consume increases, the A)multiplier declines and the IS curve becomes steeper. B)multiplier becomes larger and the IS curve becomes flatter. C)marginal propensity to consume increases and there is no effect on the IS curve. D)multiplier becomes larger and the IS curve becomes steeper.

B)multiplier becomes larger and the IS curve becomes flatter.

With normally-sloped IS and LM curves, an increase in government spending ________ the interest rate, which________ autonomous planned expenditure, resulting in a final increase in income ________ than what the government spending increase would have produced in the Chapter 3 model. A)raises, raises, greater B)raises, lowers, less C)lowers, lowers, greater D)lowers, raises, greater E)raises, raises, less

B)raises, lowers, less

The LM curve is the set of combinations of ________ such that ________. A)interest rates and real money balances, the money supply is equally demanded B)real income and interest rates, the money supply is equally demanded C)real income and real money balances, the production of output is equally demanded D)interest rates and real money balances, real income equals real money balances times (1/r) E)real income and interest rates, the production of output is equally demanded

B)real income and interest rates, the money supply is equally demanded

The "crowding-out" effect refers to the fact that A)there may be a liquidity trap. B)rising interest rates tend to accompany an expansionary fiscal policy. C)fiscal policy cannot be used to shift the IS curve. D)All of these.

B)rising interest rates tend to accompany an expansionary fiscal policy.

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y fall to3,900, the same quantity of real money balances A)will be demanded again provided the interest rate rises by a certain amount. B)will be demanded again provided the interest rate falls by a certain amount. C)will be demanded again provided the interest rate does not change. D)will not be demanded under any conditions.

B)will be demanded again provided the interest rate falls by a certain amount.

A steep IS curve implies that A)changes in money supply will have large multiplier effects on output. B)a decrease in taxes will change output by a relatively small amount. C)an increase in money supply will change output by a relatively small amount. D)A and B.

C)an increase in money supply will change output by a relatively small amount.

Which of the following would shift the LM curve? A)an increase in the tax rate B)a reduction in business confidence C)an increase in the real money supply D)All of these.

C)an increase in the real money supply

Autonomous planned spending includes five components of which two are dependent on the interest rates.These are A)the demand for exports and the demand for imports. B)government spending and autonomous tax revenue. C)autonomous consumption and planned investment. D)government spending and investment.

C)autonomous consumption and planned investment.

in the IS-LM model, equilibrium income can be affected by A)monetary policy alone. B)fiscal policy alone. C)both fiscal and monetary policy. D)neither monetary nor fiscal policy.

C)both fiscal and monetary policy.

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending takes us to a new equilibrium with ________ income and ________ interest rate. A)lower, an unchanged B)higher, a lower C)higher, a higher D)an unchanged, a higher E)an unchanged, a lower

C)higher, a higher

Crowding-out is eliminated when the LM curve is ________, so that expansionary fiscal policy ________ the interest rate. A)horizontal, raises B)vertical, raises C)horizontal, does not affect D)vertical, does not affect

C)horizontal, does not affect

The economy is in short-run equilibrium A)at any point on the LM curve. B)at any point on the IS curve. C)only at a point that is on both the IS and LM curves. D)only at the natural level of GDP.

C)only at a point that is on both the IS and LM curves.

in the IS-LM diagram, we are in "general equilibrium" A)at all points. B)at all points on the IS curve. C)only at the intersection of the IS and LM curves. D)at all points on the LM curve.

C)only at the intersection of the IS and LM curves.

As income and production rise, the demand for real money balances will ________ and interest rates will________. A)rise; fall B)fall; rise C)rise; rise D)fall; fall

C)rise; rise

Monetary policy will have a large income effect provided the A)sensitivity of autonomous spending to interest rates is low. B)sensitivity of output changes to interest rates is small. C)sensitivity of autonomous spending to interest rates is high. D)None of the above.

C)sensitivity of autonomous spending to interest rates is high.

When (if at all) can the crowding-out effect be prevented? A)when the Fed decreases the money supply to accommodate the expansionary fiscal policy B)when the real balance effect is working C)when the Fed allows the real money supply to increase sufficiently to keep the interest rate from rising D)when the real money supply is held constant

C)when the Fed allows the real money supply to increase

A change in the interest rate will generally affect the A)level of consumption. B)the amount of money people want to hold. C)level of investment. D)All of these.

D)All of these.

Monetary policy will have a large income effect provided the A)LM curve is steep. B)IS curve is steep. C)LM curve is flat. D)IS curve is flat.

D)IS curve is flat.

Moving upward along an LM curve, ________ quantity of real money balances is equally demanded as higher real incomes are accompanied by ________ interest rates. A)a constant, falling B)an increasing, rising C)a decreasing, falling D)a constant, rising E)an increasing, falling

D)a constant, rising

The money supply consists of A)checking and savings accounts. B)currency alone. C)checking accounts alone. D)currency and checking accounts. E)currency and checking and savings accounts.

D)currency and checking accounts.

If there is unplanned inventory decumulation there is excess A)supply of bonds. B)supply of commodities. C)demand for bonds. D)demand for commodities.

D)demand for commodities.

In the early stages of macroeconomic model building, the money supply is regarded as a policy ________ that is under ________ control by the Federal Reserve. A)goal, imperfect B)instrument, imperfect C)goal, perfect D)instrument, perfect

D)instrument, perfect

Factors that shift the demand schedule for money include all of the following EXCEPT A)wealth. B)interest rate paid on money. C)payment technology. D)interest rate paid on non-money assets.

D)interest rate paid on non-money assets.

An increase in real GDP causes the demand for real money balances to A)rise, fall, or remain unaffected depending on the interest rate at the time. B)remain unaffected. C)fall. D)rise.

D)rise.

if the interest rate were to rise, we expect that A)autonomous expenditures will rise. B)the amount of money people want to hold will rise. C)the supply of money will fall. D)the amount of money people want to hold will fall.

D)the amount of money people want to hold will fall.

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y riseto 4,200, the same quantity of real money balances A)will be demanded again provided the interest rate falls by a certain amount. B)will be demanded again provided the interest rate does not change. C)will not be demanded under any conditions. D)will be demanded again provided the interest rate rises by a certain amount.

D)will be demanded again provided the interest rate rises by a certain amount.