ch 11 econ quiz

The IS-LM model is generally used: A) only in the short run. B) only in the long run. C) both in the short run and the long run. D) in determining the price level.

A) only in the short run

An increase in the interest rate: A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects. B) increases planned investment, because people who make money from interest have more money to invest. C) has no effect on investment. D) may be caused by a drop in investment demand.

A) reduces planned investment because the interest rate is the cost of borrowing to finance investment projects

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will: A) sell interest-earning assets in order to obtain non-interest-bearing money. B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. C) purchase fewer goods and services. D) be content with their portfolios.

A) sell interest-earning assets in order to obtain non-interest-bearing money

The IS curve shifts when any of the following economic variables change except: A) the interest rate. B) government spending. C) tax rates. D) the marginal propensity to consume.

A) the interest rate

In the Keynesian-cross model, actual expenditures equal: A) GDP. B) the money supply. C) the supply of real balances. D) unplanned inventory investment.

A) GDP

The simple investment function shows that investment ______ as ______ increases. A) decreases; the interest rate B) increases; the interest rate C) decreases; government spending D) increases; government spending

A) decreases; the interest rate

An increase in income raises money ______ and ______ the equilibrium interest rate. A) demand; raises B) demand; lowers C) supply; raises D) supply; lowers

A) demand; raises

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.

A) downward and to the left

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

A) increase by 100

According to the theory of liquidity preference, the supply of nominal money balances: A) is chosen by the central bank. B) depends on the interest rate. C) varies with the price level. D) changes as the level of income changes.

A) is chosen by the central bank

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

A) is larger than

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. A) national income; goods and services B) the price level; goods and services C) national income; money D) the price level; money

A) national income; goods and services

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.

C) 1,600

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income. A) aggregate demand; aggregate supply B) aggregate supply; aggregate demand C) monetary policy; fiscal policy D) fiscal policy; monetary policy

B) aggregate supply; aggregate demand

When planned expenditure is drawn on a graph as a function of income, the slope of the line is: A) zero. B) between zero and one. C) one. D) greater than one.

B) between zero and one

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy: A) increases the amount of money in the economy. B) changes income, which changes consumption, which further changes income. C) is government spending and, therefore, more powerful than private spending. D) changes the interest rate.

B) changes income, which changes consumption, which further changes income

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.

B) drop by 2 percent

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250.

B) increase by more than 250

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250.

B) increases by more than 250

When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce production. C) hire more workers and increase production. D) call for more government spending.

B) lay off workers and reduce production

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will: A) sell interest-earning assets in order to obtain non-interest-bearing money. B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. C) purchase more goods and services. D) be content with their portfolios.

B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that: A) government spending increases the MPC more than tax cuts. B) the government-spending multiplier is larger than the tax multiplier. C) government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. D) increases in government spending increase planned spending, but tax cuts reduce planned spending.

B) the government-spending increases do not lead to unplanned changes in inventories, but tax cuts do

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply? A) planned spending B) the interest rate C) production D) the price level

B) the interest rate

When the LM curve is drawn, the quantity that is held fixed is: A) the nominal money supply. B) the real money supply. C) government spending. D) the tax rate.

B) the real money supply

A decrease in the real money supply, other things being equal, will shift the LM curve: A) downward and to the left. B) upward and to the left. C) downward and to the right. D) upward and to the right.

B) upward and to the left

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.

B) upward and to the right

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent. A) 2 B) 4 C) 6 D) 8

C) 6

The IS and LM curves together generally determine: A) income only. B) the interest rate only. C) both income and the interest rate. D) income, the interest rate, and the price level.

C) both income and the interest rate

Both Keynesians and supply-siders believe a tax cut will lead to growth: A) and both agree it works through incentive effects. B) but Keynesians believe it works through incentive effects whereas supply-siders believe it works through aggregate demand. C) but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects. D) and both agree it works through aggregate demand.

C) but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______. A) saving and investment; planned spending B) real-money balances; loanable funds C) goods and services; real money balances D) real-money balances; goods and services

C) goods and services; real money balances

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes. A) the budget deficit B) consumption C) income D) real balances

C) income

An LM curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income, which bring equilibrium in the market for real money balances. D) interest rates and income, which bring equilibrium in the market for goods and services.

C) interest rates and income, which bring equilibrium in the market for real money balances

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances. A) inflation and unemployment B) the price level and real output C) the interest rate and the level of income D) the interest rate and real money balances

C) the interest rate and the level of income

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances.

C) unplanned inventory invesment

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable income. A) velocity; demand for loanable funds B) demand for loanable funds; velocity C) aggregate demand; aggregate supply D) aggregate supply; aggregate demand

D) aggregate supply; aggregate demand

In the IS-LM model, which two variables are influenced by the interest rate? A) supply of nominal money balances and demand for real balances B) demand for real money balances and government purchases C) supply of nominal money balances and investment spending D) demand for real money balances and investment spending

D) demand for real money balances and investment spending

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

D) increase, but by less than 100

An IS curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income that bring equilibrium in the market for real balances. D) interest rates and income that bring equilibrium in the market for goods and services.

D) interest rates and income that bring equilibrium in the market for goods and services

According to the theory of liquidity preference, the supply of real money balances: A) decreases as the interest rate increases. B) increases as the interest rate increases. C) increases as income increases. D) is fixed.

D) is fixed

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on: A) low levels of capital. B) an untrained labor force. C) inadequate technology. D) low aggregate demand.

D) low aggregate demand

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively

D) negatively; positively

For the purposes of the Keynesian cross, planned expenditure consists of: A) planned investment. B) planned government spending. C) planned investment and government spending. D) planned investment, government spending, and consumption expenditures.

D) planned investment, government spending, and consumption expenditures

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets? b. What two variables adjust to bring equilibrium in the markets?

a. the IS-LM model simultaneously determines equilibrium in the goods market and the money market b. the interest rate and the real output are the two variables that adjust to bring equilibrium in both markets