EC 309 Final MC

Which variable is constant in the IS-LM model? a. The interest rate. b. The money supply. c. Nominal output. d. The price level.

d. The price level.

In the IS-LM model, which of the following causes both income to decline and the interest rate to decline? a. An increase in taxes. b. A decrease in taxes. c. An increase in the money supply. d. A decrease in the money supply.

a. An increase in taxes.

An increase in government expenditure 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

Which statement is TRUE when the interest rate is high? a. Income is high on the LM curve and low on the IS curve b. Income is high on the IS curve and low on the LM curve c. Income is high on both the IS curve and the LM curve

a. Income is high on the LM curve and low on the IS curve

Changes in monetary policy shift the: a. LM curve. b. money demand curve. c. IS curve.

a. LM curve.

In the IS-LM model, which will follow a decrease in the money supply? a. The LM curve shifts to the left. b. The LM curve shifts to the right. c. The IS curve shifts to the left. d. The IS curve shifts to the right.

a. The LM curve shifts to the left.

The simple investment function shows that investment ______ as ______ increases. a. decreases; the interest rate b. increases; the interest rate c. decreases; government spending d. increases; government spending

a. decreases; the interest rate

An increase in taxes shifts the IS curve: a. downward and to the left. b. upward and to the right. c. upward and to the left. d. downward and to the right.

a. downward and to the left.

The IS curve slopes downward because a __________ income increases savings and thus __________ . a. higher, lower interest rate b. higher, higher interest rate

a. higher, lower interest rate

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. a. national income; goods and services b. the price level; goods and services c. national income; money d. the price level; money

a. national income; goods and services

Which was NOT a shock that led to the recession of 2001? a. A fall in the stock market b. A financial crisis arising from mortgage defaults c. Widely publicized accounting scandals d. The September 11 terrorist attacks

b. A financial crisis arising from mortgage defaults

Suppose that a heightened risk of terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand hence the output, the Fed should a. Increase the money supply to raise interest rate. b. Increase the money supply to lower interest rates. c. Decrease the money supply to raise interest rate.

b. Increase the money supply to lower interest rates.

If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will ___________, and the impact on income will be ___________ than if the money supply were held constant. a. Increase, smaller b. Increase, larger c. Decrease, larger

b. Increase, larger

In the IS-LM model, which variables are endogenous? a. G and T b. Y and r c. M and P d. G,T,M, and P

b. Y and r

The LM curve slopes upward because ___________ income increases money _________ and, in turn, the interest rate. a. higher, supply b. higher, demand c. lower, supply d. lower, demand

b. higher, demand

In the IS-LM model, an increase in the interest rate would be the result of a(n): a. increase in the money supply. b. increase in government purchases. c. increase in taxes. d. decrease in money demand.

b. increase in government purchases.

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.

A newspaper reports that "the FOMC has raised interest rates." This statement should be interpreted as follows: "The FOMC has instructed Fed bond traders to ______ bonds in open-market operations so as to _______ the money supply, shift the LM curve, and ______ the equilibrium interest rate to hit a new lower target." a. sell, increase, decrease b. sell, decrease, increase c. buy, decrease, increase

b. sell, decrease, increase

According to the theory of liquidity preference, the central bank can increase the ___________ of money and __________ the interest rate. a. supply, raise b. supply, lower c. demand, raise d. demand, lower

b. supply, lower

The IS-LM model takes ______ as exogenous. a. the price level and national income b. the price level c. national income d. the interest rate

b. the price level

The IS-LM model is best equipped to help economists analyze: a. the long run. b. the short run. c. the supply side of the economy. d. inflationary pressures.

b. the short run

A decrease in taxes shifts the IS curve: 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. upward and to the right.

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. The equilibrium interest rate is ______ percent. a. 2 b. 4 c. 6 d. 8

c. 6

A decrease in the money supply shifts the ______ curve to the left, and the aggregate demand curve ______. a. IS; shifts to the right b. IS; does not shift c. LM; shifts to the left d. LM; does not shift

c. LM; shifts to the left

In the IS-LM model, which will follow a decrease in government purchases? a. The LM curve shifts to the left. b. The LM curve shifts to the right. c. The IS curve shifts to the left. d. The IS curve shifts to the right.

c. The IS curve shifts to the left.

In the IS-LM model, an increase in output would be the result of a(n): a. increase in taxes. b. decrease in the money supply. c. decrease in money demand. d. decrease in government purchases.

c. decrease in money demand.

An increase 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.

c. downward and to the right.

Starting from a short-run equilibrium smaller 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. output will increase, but the price level will decrease.

The intersection of the IS and LM curves determines the values of: a. r, Y, and P, given G, T, and M. b. r, Y, and M, given G, T, and P. c. r and Y, given G, T, M, and P. d. p and Y, given G, T, and M.

c. r and Y, given G, T, M, and P.

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. r2, Y3.

At the intersection of the IS and LM curves, a. the economy is at full employment b. the economy has the right balance of inflation and unemployment c. the goods market and money market are both in equilibrium d. the goods market disequilibrium offset the money market disequilibrium

c. the goods market and money market are both in equilibrium

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances. 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

c. the interest rate and the level of income

In the IS-LM model, which of the following causes income to decline and the interest rate to rise? a. An increase in taxes. b. A decrease in taxes. c. An increase in the money supply. d. A decrease in the money supply.

d. A decrease in the money supply.

In the IS-LM model, which variables are exogenous? a. G and T b. Y and r c. M and P d. G,T,M, and P

d. G,T,M, and P

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