Macro 100B Quiz 6-Chapter 12

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

LM; 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

An unexpected deflation can change demand by redistributing wealth from:

debtors to creditors, thus lowering consumption.

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

falls; rises

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

from debtors to creditors; a smaller

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

lower; raises; reduces

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

lowers; raises

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

rises; rises

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.

unexpected; reduce

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.

vertical; monetary

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

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

-2

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

IS curve downward and to the left.

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

IS; right

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.

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

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 services:

by lowering the interest rate so that investment spending increases.

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

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

increase in money demand.

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

increase in the money supply.

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 increase in income in response to a fiscal expansion in the IS-LM is:

less than in the Keynesian-cross model unless the LM curve is horizontal.

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

smaller the sensitivity of investment spending to the interest rate.

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

The Pigou effect:

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

Possible explanations put forth for the Great Depression do not include:

the Pigou effect.