ECON301 T/F

The LM curve is horizontal at the central bank's policy choice of the interest rate.

True

An increase in income (GDP) will always be accompanied by an increase in interest rates when the money supply is not increased.

True unless in a liquidity trap (which fails to decrease interest rate and make monetary policy ineffective)

Fiscal policy describes the choice of government spending and taxes and is treated as exogenous in our goods market model.

True, government spending and taxes are exogenous, taken as given.

Bond prices and interest rates always move in opposite directions.

True.

The largest component of GDP is consumption.

True.

If the nominal money supply rises from $400 billion to $420 billion and the price level rises from an index value of 100 to 102, the real money supply rises

True. The nominal money supply rose by 10%. The price level rose by 2%. The ration M/P increased.

An increase of one unit in government spending leads to an increase of one unit in equilibrium output.

False the increase in equilibrium output is 1 x multiplier not just one unit.

An increase in the propensity to consume leads to a decrease in output.

False, a increase in propensity to consume leads to an increase in output since they have a positive relationship.

The equilibrium condition for the goods market states that consumption equals output.

False, aggregate demand = aggregate output.

An increase in government spending leads to a decrease in investment in the IS-LM model.

False, an increase in government spending leads to an increase in investment

The real money supply is constant along the LM curve.

False, as output rises, the demand for real money rises and the central bank must increase the supply of real money to keep interest rates constant.

Government spending, including transfers, was equal to 18.1% of GDP in 2014.

False, government spending excluding transfers was equal to 18.1% of GDP in 2014.

The central bank can increase the supply of money by selling bonds in the market for bonds.

False, in order to increase the supply of money the CB must buy bonds to increase the price of bonds and decrease the interest rate (expansionary open market operations)

Income and financial wealth are both examples of stock variables.

False, income is a flow variable (something expressed in units of time Income/saving) and financial wealth is a stock variable ( the value of wealth at a given moment in time)

The demand for money does not depend on the interest rate because only bonds earn interest.

False, interest rate influences whether bonds are bought and money supply. A lower interest rate increases money supply and vice versa.

The term investment, as used by economists, refers to the purchase of bonds and shares of stock.

False, investment refers to the purchase of new capital goods. Purchase of bonds and stock are referred to as financial investments

If government spending and taxes increase by the same amount, the IS curve does not shift.

False, the balanced budget multiplier is positive so the IS curve shifts right

The propensity to consume has to be positive, but other-wise it can take on any positive value.

False, the propensity to consume does have to be positive but also must be less than 1 in order for our model to work.

If the nominal money supply is $400 billion and the price level rises from an index value of 100 to an index value of 103; the real money supply rises.

False, the real money supply falls when the nominal money supply is constant and the price level rises.

A large proportion of U.S. currency appears to be held outside the United States.

True, 66% US were held by foreigners.

One factor in the 2009 recession was a drop in the value of the parameter c0.

True, A drop in c0 ( which is what people consume if there disposable income in the current year is equal to zero.) means a drop in disposable income, decreasing consumption.

The Federal Reserve can determine the money supply, but it cannot change interest rates.

False, they can determine interest rate by changing the money supply to achieve it. (Buying bonds = decrease interest rate)

The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output.

False. The IS curve is downward sloping because equilibrium in the goods market implies that the interest rate and output are inversely related.

If all the exogenous variables in the IS relation are constant, then a higher level of output can be achieved only by lowering the interest rate.

True. If taxes and government spending are given, output and the rate of interest are negatively related, because an increase in the interest rate will decrease investment and the decrease in investment will lead to a decrease in output.

The main determinants of investment are the level of sales and the interest rate.

True. The level of sales and investment are positively related, and interest rate and investment are negatively related.