Econ 309 Final Exam

Starting from a short-run equilibrium smaller than the natural rate of output, as the economy returns to a long-run equilibrium:

output will increase, but the price level will decrease.

Changes in monetary policy shift the:

LM curve

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.

6

. Which was NOT a shock that led to the recession of 2001?

A financial crisis arising from mortgage defaults

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; lef

An increase in government expenditure shifts the ______ curve to the right, and the aggregate demand curve ______.

IS; shifts to the right

An decrease in the money supply shifts the ______ curve to the left, and the aggregate demand curve ______.

LM; shifts to the left

In the IS-LM model, an increase in output would be the result of a(n):

decrease in money demand.

The simple investment function shows that investment ______ as ______ increases.

decreases; the interest rate

An increase in taxes shifts the IS curve:

downward and to the left

In the IS-LM model, an increase in the interest rate would be the result of a(n):

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:

investment.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services

The intersection of the IS and LM curves determines the values of:

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

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:

r2, Y3.

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."

sell, decrease, increase

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

The IS-LM model takes ______ as exogenous.

the price level

A decrease in taxes shifts the IS curve:

upward and to the right.

An increase in the real money supply, other things being equal, will shift the LM curve:

upward and to the right.