Exam 3

if MPC = 0.75 (and there are no income taxes but only lump-sun taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

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

400

one policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the ____ curve to the ____

IS; right

one policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ____ curve to the ____

LM; right

a decrease in the price level shifts the ____ curve to the right, and the aggregate demand curve ____

LM; shifts to the right

an increase in the money supply shifts the ____ curve to the right, and the aggregate demand curve ____

LM; shifts to the right

banks create money in:

a fractional-reserve banking system but not in a 100-percent-reserve banking system

according to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ____ the money supply

decrease

a shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ____ in the long run, as compared to a short-run equilibrium

decrease output but increase prices

in the IS-LM model when taxation increases, in short-run equilibrium, in the usual case, the interest rate ____ and output ____

falls; falls

in the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the interest rate ____ and output ____

falls; rises

according to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ____ the money supply

increase

an increase in investment demand for any given level of income and interest rates- due, for example, to more optimistic "animal spirits" - will, within the IS-LM framework, ____ output and ____ interest rates

increase; raise

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

in the United States, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

in the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ____ and output ____

rises; falls

in the IS-LM model when government spending rises, in short-run equilibrium, in the usual case, the interest rate ____ and output ____

rises; rises

when bond traders for the Federal Reserve seek to increase interest rates; they ____ bonds, which shifts the ____ curve to the left

sell; LM

the interaction of the IS curve and the LM curve together determine:

the interest rate and the level of output

an economic change that does not shift the aggregate demand curve is a change in:

the price level