Macro3

(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels of interest rates and real money balances are: A) r1 and M1/P1. B) r2 and M2/P2. C) r3 and M2/P2. D) r3 and M3/P3.

B

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

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: A) 350. B) 400. C) 600. D) 750.

C

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

B

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

C

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

C

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

C

3. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease

C

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the: A) left by 100. B) left by 200. C) right by 100. D) right by 200.

D

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

D

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 interest rate and the level of output.

D

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 200. B) 240. C) 250. D) 260.

D

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

An LM curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income, which bring equilibrium in the market for real money balances. D) interest rates and income, which bring equilibrium in the market for goods and services.

C

An explanation for the slope of the LM curve is that as: A) the interest rate increases, income becomes higher. B) the interest rate increases, income becomes lower. C) income rises, money demand rises, and a higher interest rate is required. D) income rises, money demand rises, and a lower interest rate is required.

C

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.

C

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.

C

In the IS-LM model when M rises but P remains constant, 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

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis. A) larger than the multiplier B) the same as the multiplier C) smaller than the multiplier D) sometimes larger and sometimes smaller than the multiplier

C

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

A

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

A

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3

A

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except: A) high inflation. B) low interest rates. C) stock market volatility. D) falling house prices.

A

An increase in income raises money ______ and ______ the equilibrium interest rate. A) demand; raises B) demand; lowers C) supply; raises D) supply; lowers

A

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

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

A

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

A

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A) lower the interest rate. B) raise the interest rate. C) have no effect on the interest rate. D) first lower and then raise the interest rate.

A

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.

B

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies? A) P1 > P2 and M1 > M2 B) P1 > P2 and M1 < M2 C) P1 < P2 and M1 > M2 D) P1 < P2 and M1 < M2

B

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will ______ inducing firms to ______ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease

B

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____. A) r1, Y2 B) r2, Y3 C) r3, Y3 D) r3, Y4

B

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

B

2. (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are: A) Y1 and PE1. B) Y2 and PE2. C) Y3 and PE3. D) Y3 and PE4.

B

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: A) upward and to the right. B) downward and to the right. C) downward and to the left. D) upward and to the left.

B

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.

B

During the financial crisis of 2008-09, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): A) expansionary shift in the IS curve. B) contractionary shift in the IS curve. C) expansionary shift in the LM curve. D) contractionary shift in the LM curve.

B

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: A) not change. B) be smaller. C) be bigger. D) be equal to 1.

B

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______. A) $1 billion; more than $1 billion B) $.75 billion; more than $.75 billion C) $.75 billion; $.75 billion D) $1 billion; $1 billion

B

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

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: A) consumption function. B) interest rate. C) price level. D) nominal money supply.

B

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

D

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.

D

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

D

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3

D

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