Money and banking chapter 12

Other things equal, a given change in money supply has a larger effect on demand the:

flatter the IS curve.

Other things equal, a given change in government spending has a larger effect on demand the

flatter the LM curve.

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output

horizontal; monetary

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

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.

sell; rises; decrease

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 the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by

50 and the interest rate falls by 0.5 percent

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM: shifts to the right

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; does not shift

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

If the government wants to raise investment but keep output constant, it should

adopt a loose monetary policy and a tight fiscal policy

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

In the IS-LM model when M/P rises, 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

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

increase in money demand.

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

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

investment

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

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates

lower; raise

responsiveness of money demand to the interest rate is small.

responsiveness of money demand to the interest rate is small.

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the

right by 200.

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

small; large

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 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

If the demand for real money balances does not depend on the interest rate, then the LM curve:

vertical.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by

zero.

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is

0.005.

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

IS curve downward and to the left

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.