ECON 320 QUIZ 6

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is: Y = 400 - 0.75T - 25r + G. Y = 1,600 - 3T - 100r + 4G. Y = 400 + 0.75T - 25r - G. Y = 1,600 + 3T - 100r - 4G.

Y = 1,600 - 3T - 100r + 4G.

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level. B; higher B; lower C; higher C; lower

C; higher

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____. IS; shifts to the right IS; does not shift LM: shifts to the right LM; does not shift

LM: shifts to the right

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. IS; shifts to the right IS; does not shift LM; shifts to the right LM; does not shift

LM; shifts to the right

Other things equal, a given change in government spending has a larger effect on demand the: flatter the LM curve. steeper the LM curve. smaller the interest sensitivity of money demand. larger the income sensitivity of money demand.

flatter the LM curve.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r1, Y2.

r3, Y2.

If neither investment nor consumption depends on the interest rate, then the IS curve is _____, and _____ policy has no effect on output. vertical; monetary horizontal; monetary vertical; fiscal horizontal; fiscal

vertical; monetary

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by: G / (1 - MPC). more than zero but less than G / (1 - MPC). G. zero.

zero.

Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _____, with a _____ price level. B; higher B; lower C; higher C; lower

B; lower

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. investment is autonomous, whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. the price level is fixed, whereas in the IS-LM model it is allowed to vary.

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.