Macro Chapter 12

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

B

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. A) buy; rises; increase B) sell; falls; decrease C) sell; rises; decrease D) buy; rises; decrease

C

In the IS-LM model, a decrease in output would be the result of a(n): A) decrease in taxes. B) increase in the money supply. C) increase in money demand. D) increase in government purchases.

C

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate. A) real; real B) nominal; nominal C) real; nominal D) nominal; real

C

An increase in consumer saving for any given level of income will shift the: A) LM curve upward and to the left. B) LM curve downward and to the right. C) IS curve downward and to the left. D) IS curve upward and to the right.

C

An increase in the money supply shifts the ______ curve 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

C

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: A) only the LM curve. B) only the IS curve. C) both the LM and the IS curves. D) neither the LM nor the IS curve.

C

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. A) lower; lower B) lower; higher C) no change in; lower D) no change in; higher

A

If investment does not depend on the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal

A

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending. A) less than B) greater than C) equal to D) sometimes less and sometimes greater than

A

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate. A) decrease; decrease; decrease; decrease B) increase; increase; increase; increase C) decrease; decrease; increase; increase D) increase; increase; decrease; decrease

A

In the IS-LM model, changes in taxes initially affect planned expenditures through: A) consumption. B) investment. C) government spending. D) the interest rate.

A

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

A

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.

A

The spending 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.

A

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: A) prices. B) investment. C) the money supply. D) taxes.

B

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: A) both output and the price level will increase. B) output will decrease, but the price level will increase. C) output will increase, but the price level will decrease. D) both output and the price level will decrease.

B

If the demand for real money balances does not depend on the interest rate, then the LM curve: A) slopes up to the right. B) slopes down to the right. C) is horizontal. D) is vertical.

D

The Great Depression in the United States: A) probably was caused by a rightward shift in the LM curve because the price level fell more rapidly than the fall in the money supply from 1929 to 1933. B) cannot be attributed to a fall in the money supply because the money supply did not fall. C) probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931. D) probably was caused by a leftward shift in the LM curve because interest rates remained high between 1929 and 1933.

C

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 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.

D

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3

D

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. A) vertical; fiscal B) horizontal; fiscal C) vertical; monetary D) horizontal; monetary

D