Econ 103 Final
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 service
by lowering the interest rate so that investment spending increases
the short run refers to a period
during which prices are sticky and unemployment may occur
the introduction and greater availability of credit cards
example of demand shock
In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______
falls, falls
In the IS-LM model when M/P rises, in short run equilibrium, in the usual case the interest rate ___ and output ___
falls, rises
When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______
greater, outward
The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
higher, lower
According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run
increase, decrease
In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______
increase, demand
in the keynesian-cross model, if gov't purchases increase by 250, then the equilibrium level of income
increases by more than 250
In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income
increases, increases
if the demand for real money balances does not depend on the interest rate, then the LM curve
is vertical
The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______
negative, price level
okun's law is the ____ relationship between real GDP and the___
negative, unemployment rate
the IS-LM model is generally used
only in the short run
if the short-run aggregate supply curve is horizontal and if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:
output and employment will decrease in the short run
the LM curve shows combinations of ___ that are consistent with equilibrium in the market for real money balances
the interest rate and the level of income
in the keynesian cross analysis, if the consumption function is given by C=100+0.6(Y-T) and planned investment is 100, G is 100, and T is 100, then equilibrium Y is
600
the theory of liquidity preference implies that
as the interest rate rises, the demand for real balances will fall
the IS and LM curves together generally determine
both income and interest rate
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
In the IS-LM model, changes in taxes initially affect planned expenditures through
consumption
starting from long run equilibrium, if a drought pushes up food prices throughout the economy, the fed could move the economy more rapidly back to full employment output by
increasing money supply, but at the cost of permanently higher prices
business cycles are
irregular and unpredictable
according to theory of liquidity preference, the supply of real money balances
is fixed
the theory of liquidity preference implies that, other things being equal, an increase in the real money supply will
lower the interest rate
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
If the LM curve is vertical and gov't spending rises by G, in the IS-LM analysis, the equilibrium income rises by
zero
if MPC=0.75 ( no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by
400
An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______
LM, shifts to the right
an increase in consumer saving for any given level of income will shift the
IS curve downward and to the left
The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______
IS, left
A tax cut shifts the ______ to the right, and the aggregate demand curve ______
IS, shifts to the right
changes in monetary policy shift the
LM curve
most economists believe that classical dichotomy
holds approximately in the long run but not all in the short run
the government-purchases multiplier indicates how much ___ change(s) in response to a $ change in gov't purchases
income
an explanation for the slope of the LM curve is that as
income rises, money demand rises, and a higher interest rate is required
in the keynesian cross model, the equilibrium level of income is determined by
planned spending
If the fed reduces the money supply by 5% and the quantity theory of money is true, then output will fall 5% in the short run and
prices will fall 5% in the long run
When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left
sell, LM
the pigou effect
suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more
the natural level of output is:
the level of output at which the unemployment rate is at its natural level
the IS-LM takes ___ as exogenous
the price level
recessions typically but not always include at least ___ consecutive quarters of declining real GDP
two
a decrease in the real money supply, other things being equal, will shift the LM curve:
upward and to the left