Econ 103 Final

the monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and service

by lowering the interest rate so that investment spending increases

the short run refers to a period

during which prices are sticky and unemployment may occur

the introduction and greater availability of credit cards

example of demand shock

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______

falls, falls

In the IS-LM model when M/P rises, in short run equilibrium, in the usual case the interest rate ___ and output ___

falls, rises

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______

greater, outward

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

higher, lower

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

increase, decrease

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______

increase, demand

in the keynesian-cross model, if gov't purchases increase by 250, then the equilibrium level of income

increases by more than 250

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

increases, increases

if the demand for real money balances does not depend on the interest rate, then the LM curve

is vertical

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______

negative, price level

okun's law is the ____ relationship between real GDP and the___

negative, unemployment rate

the IS-LM model is generally used

only in the short run

if the short-run aggregate supply curve is horizontal and if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

output and employment will decrease in the short run

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

the interest rate and the level of income

in the keynesian cross analysis, if the consumption function is given by C=100+0.6(Y-T) and planned investment is 100, G is 100, and T is 100, then equilibrium Y is

600

the theory of liquidity preference implies that

as the interest rate rises, the demand for real balances will fall

the IS and LM curves together generally determine

both income and interest rate

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

both the LM and the IS curves

In the IS-LM model, changes in taxes initially affect planned expenditures through

consumption

starting from long run equilibrium, if a drought pushes up food prices throughout the economy, the fed could move the economy more rapidly back to full employment output by

increasing money supply, but at the cost of permanently higher prices

business cycles are

irregular and unpredictable

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

is fixed

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

lower the interest rate

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

lower, raise

If the LM curve is vertical and gov't spending rises by G, in the IS-LM analysis, the equilibrium income rises by

zero

if MPC=0.75 ( no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by

400

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______

LM, shifts to the right

an increase in consumer saving for any given level of income will shift the

IS curve downward and to the left

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 ______

IS, left

A tax cut shifts the ______ to the right, and the aggregate demand curve ______

IS, shifts to the right

changes in monetary policy shift the

LM curve

most economists believe that classical dichotomy

holds approximately in the long run but not all in the short run

the government-purchases multiplier indicates how much ___ change(s) in response to a $ change in gov't purchases

income

an explanation for the slope of the LM curve is that as

income rises, money demand rises, and a higher interest rate is required

in the keynesian cross model, the equilibrium level of income is determined by

planned spending

If the fed reduces the money supply by 5% and the quantity theory of money is true, then output will fall 5% in the short run and

prices will fall 5% in the long run

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left

sell, LM

the pigou effect

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more

the natural level of output is:

the level of output at which the unemployment rate is at its natural level

the IS-LM takes ___ as exogenous

the price level

recessions typically but not always include at least ___ consecutive quarters of declining real GDP

two

a decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left