ECON 313

The ​IS-LM diagram on the right shows the initial equilibrium of a closed economy at point A. Now suppose that consumer confidence falls​, inducing households to spend less and attempt to save more. At the​ economy's new equilibrium at point B it can be seen​ and/or inferred that A. output​ (income) is lower​, but​ consumption, saving, and investment may be lower or higher. B. output​ (income) and consumption are lower​, but saving and investment are higher. C. output​ (income), consumption,​ saving, and investment are unambiguously lower. This is the correct answer. D. output​ (income), consumption, and investment are unambiguously lower​, but saving is higher.

C. With the fall in consumer confidence and assuming no change in monetary policy​ (i.e., no shift in the LM​ curve), output​ (income), consumption,​ saving, and investment will all be unambiguously lower. With respect to​ saving, note that in a closed​ economy, in the absence of any change in government saving​ (budget surplus), any change in investment must be matched by a corresponding change in personal saving. Since investment is unambiguously lower ​(owing to the fact that output is too and the interest rate is​ unchanged), so too must personal saving be unambiguously lower.

The combination of fiscal and monetary policies pursued In the early 1990s as part of the​ Clinton-Greenspan policy mix differed from the​ Bush-Greenspan policy mix in 2001 in that A. the early 90s mix used the two policies in the opposite direction while the 2001 mix had them in the same direction. B. the early 90s mix combined fiscal contraction with monetary expansion while the 2001 mix coupled fiscal expansion with monetary expansion. C. the early 90s goal was to achieve deficit reduction without causing a recession while the 2001 mix aimed to​ halt/soften an impending recession. D. all of the above are accurate. This is the correct answer. E. A and B only.

D. The early 90s policy mix used the two policies in the opposite​ direction, combining fiscal contraction with monetary expansion in an effort to achieve deficit reduction without causing a recession. The 2001 policy mix used the two policies in the same​ direction, combining fiscal expansion with monetary expansion in an attempt to​ halt/soften an impending recession.

The real money supply is constant along the LM curve.

FALSE. As you move along the horizontal LM​ curve, as output​ rises, the demand for real money rises and the central bank must increase the supply of real money to keep the interest rate constant.

The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output.

FALSE. The IS curve is downward sloping because equilibrium in the goods market implies that the interest rate and output are inversely related.

If government spending and taxes increase by the same​ amount, the IS curve does not shift.

FALSE. The IS curve will shift to the right since the increase in government spending and taxes by equal amounts will give rise to a balanced budget multiplier that is equal to 1.

An increase in government spending leads to a decrease in investment in the ​IS-LM model.

FALSE. The level of output will rise and at the same interest rate along the horizontal LM​ curve, investment will rise.

If the nominal money supply is​ $400 billion and the price level rises from an index value of 100 to an index value of​ 103; the real money supply rises.

FALSE. The real money supply falls when the nominal money supply is constant and the price level rises

If all the exogenous variables in the IS relation are​ constant, then a higher level of output can be achieved only by lowering the interest rate.

TRUE.

If the nominal money supply rises from​ $400 billion to​ $420 billion and the price level rises from an index value of 100 to​ 102, the real money supply rises.

TRUE. The nominal money supply rose by​ 10%. The price level rose by​ 2%. The ratio​ M/P increased.