Econ 303 Final (chp 13-15)

T/F? When the interest rate goes up, alongside the IS curve the corresponding equilibrium output increases as well

This is false because intuitively, if interest rates rise, investments will decline which causes AD and output to decline, as well. This can also be proved mathematically with the IS curve equation

On the Keynesian Cross diagram, the 45 degree line represents an equilibrium condition stating that the aggregate demand must equal output.

true

Consider the Keynesian Cross model. If the fiscal multiplier equals 2, and the government decides to increase government purchases by 100, by how much would equilibrium output increase?

200

Which diagram is drawn in which coordinates? AD-AS KEYNESIAN CROSS PHILLIPS CURVE IS

AD-AS (Y,P) KEYNESIAN (Y,AD) PHILLIP (unemployment, inflation) IS (Y, i)

T/F? The IS curve shows all combinations of interest rates and levels of output consistent with equilibrium on the market of goods.

FALSE. The IS curve does not show all combinations. IS curve shows the interest rate and the level of income.

An increase in unemployment benefits results in an increase in the disposable income of households which results in a decrease in consumption

False

In the 1960s the US FED was running a conservative monetary policy aimed at keeping inflation low

False

T/F? In the IS-LM model, when the government increases government purchases, the interest rate goes up; higher interest rate results in a decrease in tax revenues known as the "crowding out effect"

False, in the IS- LM model, an increase in government spending does lead to an increase in interest rates. Although the high amount of crowding out may cause a lower income in the economy because of the diversion of resources away from private sector can lead to lower economic growth.

T/F? The IS curve is drawn in (Y,P) coordinates

False, the IS curve is drawn in the (Y,i) coordinates

T/F? The IS curve shows all combinations of output and interest rate consistent with equilibrium on the market of money

False, the IS curve shows all combinations of output and interest rate consistent with equilibrium on the market of goods. The LM curve is on the market of money. or the LM curve shows all combinations of output and interest are consistent with equilibrium on money market. IS curve shows equilibrium on the market of goods.

T/F? The fiscal multiplier is higher in the Keynesian Cross model compared to the IS-LM model

False, the Keynesian Cross is greater than the fiscal multiplier. This is because the Keynesian Cross is the ratio of change in income to change government spending. Since, the change in income is greater than spending, this leads to larger government spending.

T/F? The LM curve shows all combinations of output and interest rate consistent with equilibrium on the market of goods

False, the LM curve shows all combinations of output and interest are consistent with equilibrium on money market. IS curve shows equilibrium on the market of goods.

T/F? The IS curve can shift in (Y,i) coordinates

True

T/F? The Keynesian cross model is derived assuming that the interest rate is constant.

True

T/F? If the FED decides to increase the quantity of money in the economy, the LM curve will shift right.

True, if the Fed increases the quantity of money supply in the economy this will lead to a rightward shift in LM curve.

T/F? If the government decides to increase spending on national defense, then in the IS-LM model the IS curve will shift right, the equilibrium interest rate will increase and the equilibrium output will go up.

True, if the government spending increases, then aggregate demand will increase causing a rightward shift in IS1 to IS2 which increases both output and interest rate.

T/F? In the IS-LM model, an increase in government purchases may result in a decrease ("crowding out") of private investment.

True, in the IS- LM model an increase in government spending will lead to rightward shift in IS curve which will then increase the interest rate which will also reduce private investment.

T/F? The IS curve displays a negative relationship between the equilibrium output and the interest rate

True. This is true as as interest rate decreases the output increase which produces a negative relationship

T/F? When government purchases increase, the IS curve shifts right in the (Y,i) coordinates

True. if the government increased purchases the IS curve shift to the right and vice versa.