EC 309 Exam 3
B) upward and to the right.
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: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.
B) in the short run, but leaves it unchanged in the long run, while lowering investment.
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 and long runs.
C) in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment.
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 and long runs.
A) raises
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. A) raises B) lowers C) does not change D) may either raise or lower
B) the government-spending multiplier is larger than the tax-multiplier
Based on the Keynesian model, one reason to support government spending increases over tax cuts as measure to increase output is that: A) government spending increases the MPC more than tax cuts B) the government-spending multiplier is larger than the tax-multiplier C) government-spending increase do not leas to unplanned changes in inventories, but tax cuts do. D) increases in government spending increase planned spending, but tax cuts reduce planned spending.
B) downward and to the right
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) upward and to the left.
A decrease in the real money supply, other things being equal, will shift the LM curve: A) downward and to the left. B) upward and to the left. C) downward and to the right. D) upward and to the right.
A) increase
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ________ the money supply. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase
B) decrease
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase
B) 100.
According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by: A) 0. B) 100. C) 150. D) 250.
C) G divided by the quantity one minus the marginal propensity to consume.
According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by: A) one unit. B) G. C) G divided by the quantity one minus the marginal propensity to consume. D) G multiplied by the quantity one plus the marginal propensity to consume.
A) increases; increases
According to the quantity equation, if velocity is not assumed to be constant and the money supply is held constant, then an increase in the interest rate ______ velocity and ______ income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
A) increase; increase
According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
A) is chosen by the central bank.
According to the theory of liquidity preference, the supply of nominal money balances: A) is chosen by the central bank. B) depends on the interest rate. C) varies with the price level. D) changes as the level of income changes.
D) is fixed.
According to the theory of liquidity preference, the supply of real money balances: A) decreases as the interest rate increases. B) increases as the interest rate increases. C) increases as income increases. D) is fixed.
B) increase; decrease
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
C) interest rates and income, which bring equilibrium in the market for real money balances.
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.
B) raises income.
For any given interest rate and price level, an increase in the money supply: A) lowers income. B) raises income. C) has no effect on income. D) lowers velocity
D) planned investment, government spending, and consumption expenditures.
For the purposes of the Keynesian cross, planned expenditure consists of: A) planned investment. B) planned government spending. C) planned investment and government spending. D) planned investment, government spending, and consumption expenditures.
D) 400.
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) horizontal; fiscal
If investment demand is infinite below some certain r (e.g., r**) and zero above r**, 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) IS; vertical
If investment does not depend on the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal
D) LM; horizontal
If money demand is extremely sensitive to the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal
D) either higher, lower, or unchanging interest rates.
If real money balanced enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will result in higher income and A) higher interest rates. B) lower interest rates C) no change in interest rates D) either higher, lower, or unchanging interest rates.
D) zero.
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 by less than G/(1-MPC). C) G. D) zero.
B) LM; right
If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______. A) LM; left B) LM; right C) IS; left D) IS; right
D) decrease; LM
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
B) investment.
In the IS-LM model under the usual conditions 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.
In the IS-LM model under the usual conditions 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.
C) falls; rises
In the IS-LM model when M rises but P remain 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) falls; rises
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
B) rises; rises
In the IS-LM model when government spending 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
D) falls; falls
In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ________ and output ________. A) rises; falls B) rises; rises C) falls; rises D) falls; falls
D) buy; rises; decrease
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
A) decrease; decrease; decrease; decrease
In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate. A) decrease; decrease; decrease; decrease B) increases; increase; increases; increase C) decrease; decrease; increase; increase D) increase; increase; decrease; decrease
A) increase in the money supply.
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
D) decreases; increases
In the Keynesian-cross model, as the interest rate increases, the equilibrium level of income ______, whereas in the loanable funds model, as the level of income increases, the equilibrium level of the interest rate ______. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
B) increases by more than 250.
In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250.
B) $0.75 billion; more than $0.75 billion
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) $0.75 billion; more than $0.75 billion C) $0.75 billion; $0.75 billion D) $1 billion; $1 billion
D) in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.
Most economists believe: A) the Great Depression is very likely to be repeated. B) it is likely that the money supply might again fall by one-fourth, but that fiscal policy would be expansionary enough in this case to avoid a Great Depression. C) it is unlikely that the money supply might fall again by one-fourth, but it is likely that fiscal policy might be so contractionary as to cause a Great Depression. D) in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.
D) the Pigou effect.
Possible explanations put forth for the Great Depression do not include: A) a shift in the IS curve. B) a shift in the LM curve. C) the debt-deflation theory. D) the Pigou effect.
B) output will decrease, but the price level will increase
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
C) the interest rate and the level of income
The IS curve shows combinations of ________ that are consistent with equilibrium in the market for goods and services. A) inflation and unemployment B) the price level and real output C) the interest rate and the level of income D) the interest rate and real money balances
A) only in the short run.
The IS-LM model is generally used: A) only in the short run. B) only in the long run. C) both in the short run and the long run. D) in determining the price level.
D) smaller; greater
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
C) consumer spending; IS
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
B) suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.
The Pigou effect: A) suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. B) suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more. C) suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more. D) is generally accepted as adequate proof that the economy must be able to correct itself.
C) less than in the Keynesian-cross model unless the LM curve is horizontal.
The increase in income in response to a fiscal expansion in the IS-LM is: A) always less than in the Keynesian-cross model. B) less than in the Keynesian-cross model unless the LM curve is vertical. C) less than in the Keynesian-cross model unless the LM curve is horizontal. D) less than in the Keynesian-cross model unless the IS curve is vertical.
C) leftward shift in the LM curve.
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.
A) leftward shift in the IS curve.
The spending 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.
D) negatively related to the interest rate and positively related to income.
The theory of liquidity preference implies that the quantity of real money balances demanded is: A) negatively related to both the interest rate and income. B) positively related to both the interest rate and income. C) positively related to the interest rate and negatively related to income. D) negatively related to the interest rate and positively related to income.
A) lower the interest rate.
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) as the interest rate rises, the demand for real balances will fall.
The theory of liquidity preference implies that: A) as the interest rate rises, the demand for real balances will fall. B) as the interest rate rises, the demand for real balances will rise. C) the interest rate will have no effect on the demand for real balances. D) as the interest rate rises, income will rise.
B) responsiveness of money demand to the interest rate is small.
Those 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) buy; LM
When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right. A) buy; IS B) buy; LM C) sell; IS D) sell; LM
D) slopes downward and to the right.
When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally: A) is vertical. B) is horizontal. C) slopes upward and to the right. D) slopes downward and to the right.
B) lay off workers and reduce production.
When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce production. C) hire more workers and increase production. D) call for more government spending.
B) right; accumulation
With planned expenditure and the equilibrium condition Y = E 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 ______. A) right; decumulation B) right; accumulation C) left; decumulation D) left; accumulation