test 2

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) IS curve downward and to the left.

In the Keynesian-cross model, actual expenditures equal: A) GDP. B) the money supply. C) the supply of real balances. D) unplanned inventory investment.

A) GDP.

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) IS; vertical

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, 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.

B) be smaller.

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.

B) drop by 2 percent.

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) investment.

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.

D) both government spending and tax rates are fixed.

(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) decrease; LM3

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

D) decreases; downward

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) horizontal; monetary

According to the theory of liquidity preference, the supply of real money balances: A) decreases as the interest rate increases. B) increases as the interest rate increases. C) increases as income increases. D) is fixed.

D) is fixed.

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) is vertical.

The LM curve generally determines: A) income. B) the interest rate. C) both income and the interest rate. D) neither income nor the interest rate.

D) neither income nor the interest rate.

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.

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

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) consumption.

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) decrease; decrease; decrease; decrease

The simple investment function shows that investment ______ as ______ increases. A) decreases; the interest rate B) increases; the interest rate C) decreases; government spending D) increases; government spending

A) decreases; the interest rate

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) flatter the IS curve.

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

A) increases; increases

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

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) leftward shift in 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. A) less than B) greater than C) equal to D) sometimes less and sometimes greater than

A) less than

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) lower; lower

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances. A) raises B) lowers C) does not change D) may either raise or lower

A) raises

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.

A) sell interest-earning assets in order to obtain non-interest-bearing money.

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) output will decrease, but the price level will increase.

(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) r3, Y2

(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

B) rise; decrease

After the Kennedy tax cut in 1964, real GDP: A) fell and unemployment rose. B) rose and unemployment fell. C) and unemployment both rose. D) and unemployment both fell.

B) rose and unemployment fell.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that: A) government spending increases the MPC more than tax cuts. B) the government-spending multiplier is larger than the tax multiplier. C) government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. D) increases in government spending increase planned spending, but tax cuts reduce planned spending.

B) the government-spending multiplier is larger than the tax multiplier.

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply? A) planned spending B) the interest rate C) production D) the price level

B) the interest rate

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) LM: shifts to the right

The equilibrium condition in the Keynesian-cross analysis in a closed economy is: A) income equals consumption plus investment plus government spending. B) planned expenditure equals consumption plus planned investment plus government spending. C) actual expenditure equals planned expenditure. D) actual saving equals actual investment.

C) actual expenditure equals planned expenditure.

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) both the LM and the IS curves.

An explanation for the slope of the LM curve is that as: A) the interest rate increases, income becomes higher. B) the interest rate increases, income becomes lower. C) income rises, money demand rises, and a higher interest rate is required. D) income rises, money demand rises, and a lower interest rate is required.

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

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) increase in money demand.

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.

C) is fixed, whereas the IS analysis assumes it depends on the interest rate

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) 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.

The intersection of the IS and LM curve determines the values of: A) r, Y, and P, given G, T, and M. B) r, Y, and M, given G, T, and P. C) r and Y, given G, T, M, and P. D) p and Y, given G, T, and M.

C) r and Y, given G, T, M, and P.

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) real; nominal

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) sell; rises; decrease

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

C) the interest rate and the level of income

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances.

C) unplanned inventory investment.

(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) this represents a movement down the aggregate demand curve.