Chapter 12

An increase in government spending generally shifts the IS curve:

upward and to the right.

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

a higher interest rate.

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

historically tax cuts have been more successful than spending-based fiscal stimulus.

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

income

The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes.

income

In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income.

increases; increases

An IS curve shows combinations of:

interest rates and income that bring equilibrium in the market for goods and services.

The interest rate determines _____ in the goods market and money _____ in the money market.

investment spending; demand

According to the theory of liquidity preference, the supply of real money balances

is fixed by the central bank.

The Keynesian-cross analysis assumes planned investment:

is fixed, whereas the IS analysis assumes it depends on the interest rate.

John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:

low aggregate demand.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

Two interpretations of the IS-LM model are that the model explains:

the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.

The IS-LM model takes _____ as exogenous.

the price level

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

unplanned inventory investment.

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

actual expenditure equals planned expenditure.

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:

be smaller.

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand, whereas supply-siders believe it works through incentive effects.

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:

changes income, which changes consumption, which further changes income.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

decreases; downward

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:

drop by 2 percent.

The equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short run.

The theory of liquidity preference states that, other things being equal, an increase in the real money supply will:

lower the interest rate.

Equilibrium levels of income and interest rates are _____ related in the goods and services market, and equilibrium levels of income and interest rates are _____ related in the market for real money balances.

negatively; positively

The LM curve generally determines:

neither income nor the interest rate.