CH 12
If taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:
$25 billion
If expected inflation is 3% and monetary policymakers push the nominal interest rate to 1%, the real interest rate is ______.
-2%
If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is:
0.005
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:
300
If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:
400
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
Tax cuts can be represented in the IS-LM model by shifting the ______ curve to the ______.
IS, right
A tax cut shifts the ______ curve to the right, and the AD curve ______.
IS, to the right
Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.
Keynesian, short-run (Classical is most appropriate in long-run)
A decrease in P shifts the ______ curve to the right, and the AD curve ______.
LM, does not shift
If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.
LM, right
Increase in money growth can be represented in the IS-LM model by shifting the ______ curve to the ______.
LM, right
An increase in M shifts the ______ curve to the right, and the AD curve ______.
LM, to the right
An economic change that does not shift the AD curve is a change in:
P (price level)
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.
P, decrease
If there is a increase in the LM curve (LM1 moves down and left to LM2) then how does P and M change?
P1 is greater than P2, M1 is less than M2
Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:
Y decreases but P increases
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 result in higher income and:
an higher, lower, or the same interest rate
The Pigou effect says that:
as prices fall and real money balances increase, consumers will feel wealthier and spend more
If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in P will shift:
both the LM and the IS curves
When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the______ curve to the right.
buy, LM
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 services:
by lowering the interest rate so that investment can increase
In the IS-LM model, changes in taxes initially affect planned expenditures through:
consumption
During the financial crisis of 2008 financial institutions stopped making loans even to creditworthy customers. This could be represented in the IS-LM model as a(n):
contractionary (loose) shift in IS curve
An unexpected deflation can change demand by redistributing wealth from:
debitors to creditors, thus lowering consumption
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.
decrease
In the IS-LM model, a increase in expected deflation leads to a(n):
decrease in Y and the nominal interest rate
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:
decrease in r and decrease in Y
An increase in the demand for money, at any given income and interest rate level will, within the IS-LM framework, ______ output and ______ interest rates.
decrease, increase
In the IS-LM model when M/P rises, (or if M rises but P remains constant) in short-run equilibrium, in the usual case the interest rate ______ and output
decreases, increases
One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.
decreases, increases
Other things equal, a given change in M has a larger effect on demand the:
flatter the IS curve is
Other things equal, a given change in government spending has a larger effect on demand the:
flatter the LM curve is
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.
from debitors to creditors, a smaller
All of the following may have contributed to the financial crisis and economic downturn of 2008 except:
high inflation
If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.
horizontal, fiscal
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.
horizontal, monetary
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
increase
In the IS-LM model, a decrease in output would be the result of a(n):
increase in money demand
In the IS-LM model, a decrease in the interest rate would be the result of a(n):
increase in money supply
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 ______.
increases, decreses
A liquidity trap occurs when:
interest rates fall so low that monetary policy is no longer effective
The monetary transmission mechanism works through the effects of changes in the money supply on:
investment
If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very______ levels.
monetary, low
Other things equal, an expected deflation can change demand by:
raising the real interest rate (r) for any given nominal interest rate which reduces demand for investment.
Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.
real, nominal
Most economists believe:
repeat of the Great Depression is unlikely
Those economists who believe that fiscal policy is more potent than monetary policy argue that the:
responsiveness of investment to the interest rate is small
Those economists who believe that monetary policy is more potent than fiscal policy argue that the:
responsiveness of money demand to the interest is small
If the economy starts from a short-term equilibrium that is less than the natural level of output, then in the long-run the equilibrium will move to the ____ with a _____ price level.
right (to the natural level of output), lower
If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:
right by 200
When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the______ curve to the left.
sell, LM
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.
sell, increases, decrease
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.
smaller than the multiplier
When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:
smaller the sensitivity of investment spending to the interest rate
The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.
smaller, greater
If LM shifts up and to the left because M decreases, then holding other factors constant:
the AD curve will shift the to the left
Possible explanations put forth for the Great Depression do not include:
the Pigou effect
All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:
the decrease in money supply between 1929-1933
The interaction of the IS curve and the LM curve together determine:
the interest rate and the level of output
The slope of the IS curve depends on:
the interest sensitivity of investment and the marginal propensity to consume
If LM shifts down and to the right, because P decreases, then holding other factors constant:
this represents a movement down along the AD curve
If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output.
vertical, fiscal
If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.
vertical, monetary
If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:
zero
An increase in consumer saving for any given level of income will shift the:
IS curve down and to the left
In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:
IS curve shifts left
Starting from equilibrium in the IS-LM model, if there is an increase in government spending that shifts the IS curve up and to the right, and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____.
at a higher interest rate and a higher output
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:
investment is not affected by the interest rate but the IS-LM raises interest rate and crowds out investment for fiscal expansion
If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
investment rises and consumption falls.
A change in income in the IS-LM model for a fixed price
is a shift in the AD curve
If the demand for real money balances does not depend on the interest rate, then the LM curve:
is vertical
A given increase in taxes shifts the IS curve more to the left the:
larger the marginal propensity to consume
If the economy starts from a short-term equilibrium that is greater than the natural level of output, then the long-run equilibrium will move to the ____ with a _____ price level.
left (to the natural level of output), higher
The money hypothesis suggests that the Great Depression was caused by a:
left shift in the LM curve
The spending hypothesis suggests that the Great Depression was caused by a:
left shift of the IS curve
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.
less than
The increase in income in response to a fiscal expansion in the IS-LM is:
less than in the Keynesian-cross model unless the LM curve is horizontal.
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.
lower, lower
A change in income in the IS-LM model resulting from a change in P is represented by a ______ AD curve, while a change in income in the IS-LM model for a given P is represented by a ______ AD curve.
movement on the, shift of the
The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.
prices are fixed, output is fixed
The Pigou effect suggests that falling prices will increase income because real balances influence ___ and will shift the ___ curve.
consumer spending, IS
The Great Depression in the United States probably cannot be considered to have started because of a leftward shift of the _____ because the real balances did not fall from 1929-1931
LM curve
A movement along an AD curve corresponds to a change in income in the IS-LM model ______, while a shift in an AD curve corresponds to a change in income in the IS-LM model ______.
because of a change in P, at a given P
The AD curve generally slopes downward and to the right because, for any M, a higher P causes a ______ real money supply, which ______ the interest rate and ______ spending.
decrease in, increases, decreases
Starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income:
decrease r and increase Y
If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run P will ______, shifting the ______ curve to the right and returning output to the natural level.
decrease, LM
Starting from equilibrium in the IS-LM model, if there is an increase in government spending that shifts the IS curve up and to the right, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____.
decrease, a new LM curve that is up and to the left
In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.
decrease, decrease
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.
decrease, decrease, decrease, decrease
Starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:
increase in r and increase in Y
Starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:
increase in r and increase in Y
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:
increase r and decrease Y
Starting from equilibrium in the IS-LM model, if there is an increase in government spending that shifts the IS curve up and to the right, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____.
increase, a new LM curve that is down and to the right
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
An increase in investment demand for any given level of income and interest rates will, within the IS-LM framework, ______ output and ______ interest rates.
increase, increase
In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
increases, increases
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:
investment
The response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.
more than three times as great
The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.
unexpected, reduce