Macroeconomics Chapter 11

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by

a. $1 billion; more than $1 billion *b. $0.75 billion; more than $0.75 billion* c. $0.75 billion; $0.75 billion d. $1 billion; $1 billion

The Keynesian cross shows:

a. determination of equilibrium income and the interest rate in the short run. b. determination of equilibrium income and the interest rate in the long run. *c. equality of planned expenditure and income in the short run.* d. equality of planned expenditure and income in the long run.

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.

The JS 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.

In the Keynesian-cross model, actual expenditures equal:

*a. GDP.* b. the money supply. c. the supply of real balances. d. unplanned inventory investment.

The theory of liquidity preference implies that:

*a. as the interest rate rises, the demand for real balances will fall.* b. as the interest rate rises, the demand for real balances will rise. c. the interest rate will have no effect on the demand for real balances. d. as the interest rate rises, income will rise.

An increase in income raises money ________and ________the equilibrium interest rate.

*a. demand; raises* b. demand; lowers c. supply; raises d. supply; lowers

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.

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.

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3, then people will _____ bonds and the interest rate will ________.

*a. sell; rise* b. sell; fall c. buy; rise d. buy; fall

Two interpretations of the JS-LM model are that the model explains:

*a. the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.* b. the short-run quantity theory of income, or the short-run Fisher effect. c. the determination of investment and saving, or what shifts the liquidity preference schedule. d. changes in government spending and taxes, or the determination of the supply of real money balances.

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

A. 0. *B. 100.* c. 150. d. 250.

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.

a. increase; increase *b. increase; decrease* c. decrease; decrease d. decrease; increase

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.

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.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ________ , and this shifts the expenditure function _________ , thereby decreasing income.

a. increases; downward b. increases; upward c. decreases; upward *d. decreases; downward*

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

The Keynesian-cross analysis assumes planned investment:

a. is fixed and so does the IS analysis. b. depends on the interest rate and so does the IS analysis. *c. is fixed, whereas the IS analysis assumes it depends on the interest rate.* d. depends on expenditure and so does the IS analysis.

The LM curve, in the usual case:

a. is vertical, b. is horizontal. c. slopes down to the right. *d. slopes up to the right.*

The theory of liquidity preference implies that the quantity of real money balances demanded is:

a. negatively related to both the interest rate and income. b. positively related to both the interest rate and income. c. positively related to the interest rate and negatively related to income. *d. negatively related to the interest rate and positively related to income.*

96. In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, 7, are made a function of income, as in T= T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

a. not change. *b. be smaller.* c. be bigger. d. be equal to 1.

According to the Keynesian-cross analysis, when there is a shift upward in the government- purchases schedule by an amount AG and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

a. one unit. b. AG. *c. AG divided by the quantity one minus the marginal propensity to consume.* d. AG multiplied by the quantity one plus the marginal propensity to consume.

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*

With planned expenditure and the equilibrium condition Y= PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the _____ of equilibrium income and there is unplanned inventory _______.

a. right; decumulation *b. right; accumulation* c. left; decumulation d. left; accumulation

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will _______ inducing firms to __________ production.

a. rise; increase *b. rise; decrease* c. fall; increase d. fall; decrease

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

a. tax cuts increase the PC by a larger amount than government spending. b. tax cuts temporarily increase planned spending, but government spending permanently increases private spending. c. in theory the tax multiplier is larger than the government spending multiplier. *d. historically tax cuts have been more successful than spending-based fiscal stimulus.*

Along any given IS curve:

a. tax rates are fixed, but government spending varies. b. government spending is fixed, but tax rates vary. c. both government spending and tax rates vary. *d. both government spending and tax rates are fixed.*

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*

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.

The JS-LM model takes as exogenous.

a. the price level and national income *b. the price level* c. national income d. the interest rate

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*

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.