ECON 3900 Practice Questions Chapter 11 "Aggregate Demand: Part II"

D) Keynesian; the short run whereas the classical assumptions are most appropriate in the long run.

1. Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______. A) classical; both the short and long runs. B) Keynesian; both the short and long runs. C) classical; the short run whereas the Keynesian assumptions are most appropriate in the long run. D) Keynesian; the short run whereas the classical assumptions are most appropriate in the long run.

C) leftward shift in the LM curve.

4. The money hypothesis suggests that the Great Depression was caused by a: A) leftward shift in the IS curve. B) rightward shift in the IS curve. C) leftward shift in the LM curve. D) rightward shift in the LM curve.

D) sell; LM

5. When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left. A) buy; IS B) buy; LM C) sell; IS D) sell; LM

D) the Pigou effect.

30. Possible explanations put forth for the Great Depression do not include: A) a shift in the IS curve. B) a shift in the LM curve. C) the debt-deflation theory. D) the Pigou effect.

C) investment rises but consumption falls.

10. If taxes are raised, but the Fed prevents income from falling by raising the money supply, then: A) both consumption and investment remain unchanged. B) consumption rises but investment falls. C) investment rises but consumption falls. D) both consumption and investment fall.

A) IS; shifts to the right

11. A tax cut shifts the ______ to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift

B) investment.

12. The monetary transmission mechanism works through the effects of changes in the money supply on: A) the budget deficit. B) investment. C) government expenditures. D) taxation.

C) smaller than the multiplier

13. Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis. A) larger than the multiplier B) the same as the multiplier C) smaller than the multiplier D) sometimes larger and sometimes smaller than the multiplier

A) flatter the LM curve.

14. Other things equal, a given change in government spending has a larger effect on demand the: A) flatter the LM curve. B) steeper the LM curve. C) smaller the interest sensitivity of money demand. D) larger the income sensitivity of money demand.

C) in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment.

15. An increase in taxes lowers income: A) and the interest rate in the short run, but leaves both unchanged in the long run. B) in the short run, but leaves it unchanged in the long run, while increasing consumption and lowering investment. C) in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment. D) and the interest rate in both the short and long runs.

D) resulting from a change in the price level; at a given price level

17. A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______. A) resulting from a change in monetary policy; resulting from a change in fiscal policy B) resulting from a change in fiscal policy; resulting from a change in monetary policy C) at a given price level; resulting from a change in the price level D) resulting from a change in the price level; at a given price level

A) high inflation.

18. All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except: A) high inflation. B) low interest rates. C) stock market volatility. D) falling house prices.

B) contractionary shift in the IS curve.

19. During the financial crisis of 2008-09, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): A) expansionary shift in the IS curve. B) contractionary shift in the IS curve. C) expansionary shift in the LM curve. D) contractionary shift in the LM curve.

C) 50 and the interest rate falls by 0.5 percent.

2. 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: A) 200 and the interest rate falls by 2 percent. B) 100 and the interest rate falls by 1 percent. C) 50 and the interest rate falls by 0.5 percent. D) 200 and the interest rate remains unchanged.

B) steeper the IS curve.

20. Other things equal, a given change in government spending has a larger effect on demand the: A) flatter the IS curve. B) steeper the IS curve. C) larger the interest sensitivity of expenditure demand. D) smaller the interest sensitivity of money demand.

A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

21. The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the price level is fixed whereas in the IS-LM model it is allowed to vary.

B) rises; rises

22. In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

C) 300.

23. If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.

A) lower; raises; reduces

24. 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. A) lower; raises; reduces B) higher; lowers; increases C) lower; lowers; increases D) higher; raises; reduces

A) price level; increase

25. If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level. A) price level; increase B) interest rate; decrease C) money supply; increase D) consumption function; decrease

C) small; large

27. 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 ______. A) large; small B) small; small C) small; large D) large; large

B) vertical; fiscal

28. If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output. A) horizontal; fiscal B) vertical; fiscal C) horizontal; monetary D) vertical; monetary

A) rises; falls

3. In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

D) either higher, lower, or unchanging interest rates.

6. If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, than a fall in the price level will result in higher income and: A) higher interest rates. B) lower interest rates. C) no change in interest rates. D) either higher, lower, or unchanging interest rates.

B) the interest sensitivity of investment and the marginal propensity to consume.

7. The slope of the IS curve depends on: A) the interest sensitivity of investment and the amount of government spending. B) the interest sensitivity of investment and the marginal propensity to consume. C) the interest sensitivity of investment and the tax rates. D) tax rates and government spending.

A) from debtors to creditors; a smaller

8. 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. A) from debtors to creditors; a smaller B) from debtors to creditors; a larger C) from creditors to debtors; a smaller D) from creditors to debtors; a larger

B) monetary; low

9. If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels. A) monetary; high B) monetary; low C) fiscal; high D) fiscal; low

A) r2, Y2

Use the following to answer question 16: (Exhibit: IS-LM Monetary Policy) 16. (Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

C) C; higher

Use the following to answer question 26: (Exhibit: Short Run to Long Run) 26. (Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

B) the aggregate demand curve will shift to the left.

Use the following to answer question 29: (Exhibit: IS-LM to Aggregate Demand) 29. (Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.