CHAPTER 10,11,12

The theory of liquidity preference implies that:

as the interest rate rises, the demand for real balances will fall.

The IS and LM curves together generally determine:

both income and the interest rate.

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:

both the LM and the IS curves.

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 spending increases.

In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption.

The short run refers to a period:

during which prices are sticky and unemployment may occur.

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

falls; falls

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

falls; rises

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

greater; outward

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.

increase; decrease

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

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:

increasing the money supply, but at the cost of permanently higher prices.

Business cycles are:

irregular and unpredictable.

According to the theory of liquidity preference, the supply of real money balances:

is fixed.

If the demand for real money balances does not depend on the interest rate, then the LM curve:

is vertical.

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

lower the interest rate.

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates.

lower; raise

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

The IS-LM model is generally used:

only in the short run.

If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

output and employment will decrease in the short run.

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

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.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

600.

Changes in monetary policy shift the:

LM curve.

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM: shifts to the right

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

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

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

IS; shifts to the right

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

higher; lower

Most economists believe that the classical dichotomy:

holds approximately in the long run but not at all in the short run.

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

income

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

In the Keynesian-cross model, the equilibrium level of income is determined by:

planned spending.

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:

prices will fall 5 percent in the long run.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

sell; LM

The Pigou effect:

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.

The natural level of output is:

the level of output at which the unemployment rate is at its natural level.

The IS-LM model takes ______ as exogenous.

the price level

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

two

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

zero.