Topic 4: The IS-LM curve

Given the zero lower bound on the nominal rate, the lowest real interest rate the central bank can achieve is a) - 𝜋e b) 𝜋e c) 0 d) i

a) - 𝜋e

Suppose there is a simultaneous Fed sale of bonds and increase in consumer confidence. We know with certainty that these two simultaneous events will cause: a) an increase in the interest rate (i ) b) a reduction in i c) an increase in output (Y ) d) a reduction in Y

a) an increase in the interest rate (i )

Which of the following occurs as the economy moves leftward along a given IS curve? a) an increase in the interest rate causes investment spending to decrease b) an increase in the interest rate causes money demand to increase c) an increase in the interest rate causes a reduction in the money supply d) a reduction in government spending causes a reduction in demand for goods e) an increase in taxes causes a reduction in demand for goods

a) an increase in the interest rate causes investment spending to decrease

The IS curve will shift to the right when which of the following occurs? a) an increase in the money supply b) an increase in government spending c) a reduction in the interest rate d) all of the above e) none of the above

b) an increase in government spending

Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that a) the goods market is in equilibrium and the money market is not in equilibrium b) the money market and bond markets are in equilibrium and the goods market is not in equilibrium c) the money market and goods market are in equilibrium and the bond market is not in equilibrium d) the money, bond and goods markets are all in equilibrium e) neither the money, bond, nor goods markets are in equilibrium

b) the money market and bond markets are in equilibrium and the goods market is not in equilibrium

If investment is now more reactive to changes in sales (or production) than before, we expect a decrease in consumer confidence to lead to a) an increase in output that is larger than what we would have observed before b) an increase in output that is smaller than what we would have observed before c) a decrease in output that is larger than what we would have observed before d) a decrease in output that is smaller than what we would have observed before

c) a decrease in output that is larger than what we would have observed before

When the risk premium goes up, we expect a) no change in output if consumer confidence decreases simultaneously b) the policy rate to increase c) no change in investment if the policy rate increases simultaneously d) a large decrease in output if the government also implements a fiscal consolidation e) none of the above

d) a large decrease in output if the government also implements a fiscal consolidation

An increase in the supply of central bank money will cause an increase in which of the following variables? a) Output b) Investment c) Consumption d) all of the above e) none of the above

d) all of the above

A fiscal contraction will tend to cause which of the following to occur? a) a reduction in the interest rate and a reduction in investment b) a reduction in the interest rate and a downward shift in the LM curve c) a reduction in the interest rate and an ambiguous effect on investment d) no change in output if the central bank simultaneously pursues contractionary monetary policy e) none of the above

e) none of the above

The LM curve/line shifts down when which of the following occurs? a) an increase in taxes b) an increase in output c) an open market sale of bonds by the central bank d) an increase in consumer confidence e) none of the above

e) none of the above