Econ Quiz 9

An increase in the price level, holding nominal money supply constant, will shift the LM curve:

upward and to the left.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

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.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase, but by less than 100

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

increases by more than 250.

In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

rise; decrease

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.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

The IS curve shifts when any of the following economic variables change except:

the interest rate.

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

upward and to the left.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$1 billion; $4 billion

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 1. If the price level is fixed and the Fed wants to fix the interest rate at 4 percent, it should set the money supply at:

1,400.

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.

According to the theory of liquidity preference, holding the supply of real money balances constant, a decrease in income will ______ the demand for real money balances and will ______ the interest rate.

decrease; decrease

A decrease in government purchases shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

downward and to the left.

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.

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:

purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

raises

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

real interest rate.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation