chapter 12 econ 410

65. 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

6. If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by: A) 200. B) 300. C) 400. D) 500.

D) 500.

26. 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

41. Analysis of the short run and long run indicates that the ______ assumptions are most appropriate in ______. A) classical; both the short run and the long run B) Keynesian; both the short run and the long run 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

33. A decrease in the price level 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

D) LM; does not shift

38. 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

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) decrease; LM3

23. 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

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) B; lower

48. In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the: A) IS curve shifts leftward. B) IS curve shifts rightward. C) LM curve shifts leftward. D) LM curve shifts rightward.

A) IS curve shifts leftward.

32. A tax cut 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

A) IS; shifts to the right

28. One policy response to the U.S. economic slowdown of 2001 was to increase money growth. 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

A) LM; right

66. If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by: A) Y = 1,100, r = 6 percent. B) Y = 1,200, r = 5 percent. C) Y = 1,000, r = 5 percent. D) Y = 1,100, r = 5 percent.

A) Y = 1,100, r = 6 percent.

11. 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.

58. Other things equal, a given change in government spending has a larger effect on demand the: A) flatter the LM curve. B) steeper the LM curve. C) smaller the interest sensitivity of money demand. D) larger the income sensitivity of money demand.

A) flatter the LM curve.

46. The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors. A) from debtors to creditors; smaller B) from debtors to creditors; larger C) from creditors to debtors; smaller D) from creditors to debtors; larger

A) from debtors to creditors; smaller

24. 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.

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) increase; LM2

10. 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.

54. 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.

29. 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

49. 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

34. A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve. A) movement along the; shift in the B) shift in the; movement along the C) vertical; horizontal D) horizontal; vertical

A) movement along the; shift in the

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) r2, Y2

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) P1 > P2 and M1 < M2

62. Economists who believe that fiscal policy is more potent than monetary policy argue that the: A) responsiveness of investment to the interest rate is small. B) responsiveness of investment to the interest rate is large. C) IS curve is nearly horizontal. D) LM curve is nearly vertical.

A) responsiveness of investment to the interest rate is small.

16. 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

45. The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services. A) unexpected; reduce B) unexpected; increase C) expected; reduce D) expected; increase

A) unexpected; reduce

12. In the IS-LM analysis, the increase in income resulting from a tax cut is ______ the increase in income resulting from an equal rise in government spending. A) usually less than B) usually greater than C) usually equal to D) sometimes less and sometimes greater than

A) usually less than

61. If neither investment nor consumption depends on the interest rate, then the IS curve is ______, and ______ policy has no effect on output. A) vertical; monetary B) horizontal; monetary C) vertical; fiscal D) horizontal; fiscal

A) vertical; monetary

56. If the demand function for money is M / P = 0.5Y - 100r, then the slope of the LM curve is: A) 0.001. B) 0.005. C) 0.01. D) 0.05.

B) 0.005

51. During the financial crisis of 2008-2009, 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) contractionary shift in the IS curve.

69. 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 run and in the long run.

B) in the short run but leaves it unchanged in the long run, while lowering investment.

64. According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: A) income, the interest rate, consumption, and investment are unchanged. B) income and the interest rate rise, whereas consumption and investment fall. C) income and the interest rate fall, whereas consumption and interest rise. D) income, the interest rate, consumption, and investment all rise.

B) income and the interest rate rise, whereas consumption and investment fall.

8. In the IS-LM model 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.

37. 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.

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) r2, Y3

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) r1, Y2.

B) r3, Y2

63. Economists who believe that monetary policy is more potent than fiscal policy argue that the: A) responsiveness of money demand to the interest rate is large. B) responsiveness of money demand to the interest rate is small. C) IS curve is nearly vertical. D) LM curve is nearly horizontal.

B) responsiveness of money demand to the interest rate is small.

59. Other things equal, a given change in government spending has a larger effect on demand the: A) flatter the IS curve. B) steeper the IS curve. C) larger the interest sensitivity of expenditure demand. D) smaller the interest sensitivity of money demand.

B) steeper the IS curve.

53. The slope of the IS curve depends on: A) the interest sensitivity of investment and the amount of government spending. B) the interest sensitivity of investment and the marginal propensity to consume. C) the interest sensitivity of investment and the tax rates. D) tax rates and government spending.

B) the interest sensitivity of investment and the marginal propensity to consume.

60. If money demand does not depend on the interest rate, then the LM curve is ______, and ______ policy has no effect on output. A) horizontal; fiscal B) vertical; fiscal C) horizontal; monetary D) vertical; monetary

B) vertical; fiscal

7. If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.

C) 300.

67. If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P) d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by: A) 200 and the interest rate falls by 2 percent. B) 100 and the interest rate falls by 1 percent. C) 50 and the interest rate falls by 0.5 percent. D) 200 and the interest rate remains unchanged.

C) 50 and the interest rate falls by 0.5 percent.

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) C; higher

22. 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.

27. 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

31. 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

44. If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: A) only the LM curve. B) only the IS curve. C) both the LM and the IS curves. D) neither the LM nor the IS curve.

C) both the LM and the IS curves.

43. The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve. A) money demand; LM B) the money supply; LM C) consumer spending; IS D) government spending; IS

C) consumer spending; IS

15. 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

70. An increase in taxes lowers 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 increasing consumption and lowering investment. C) in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment. D) and the interest rate in both the short run and in the long run.

C) in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment.

25. In the IS-LM model, a decrease in output would be the result of a(n): A) decrease in taxes. B) increase in the money supply. C) increase in money demand. D) increase in government purchases.

C) increase in money demand

52. 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.

42. 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.

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) r2, Y3

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) r2, Y3.

50. 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.

47. 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

17. In the IS-LM model when the Federal Reserve decreases the money supply, the public ______ bonds, and the interest rate ______, leading to a(n) ______ in investment and income. This is called the monetary transmission mechanism. A) buy; rises; increase B) sell; falls; decrease C) sell; rises; decrease D) buy; rises; decrease

C) sell; rises; decrease

9. 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) smaller than the multiplier

30. 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.

68. An increase in the money supply: A) increases income and lowers the interest rate in both the short run and in the long run. B) increases income in both the short run and in the long run but leaves the interest rate unchanged in the long run. C) lowers the interest rate in both the short run and in the long run 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.

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) r3, Y3.

36. 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

57. If the demand function for money is M / P = 0.2Y - 200r, 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 500. C) right by 100. D) right by 500.

D) right by 500.

55. The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand. A) greater; greater B) greater; smaller C) smaller; smaller D) smaller; greater

D) smaller; greater

1. The interaction of the IS curve and the LM curve determines: A) the price level and the inflation rate. B) the level of output 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.

5. 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.