Chapter 12
An increase in government spending generally shifts the IS curve:
upward and to the right.
With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:
a higher interest rate.
One argument in favor of tax cuts over spending-based fiscal stimulus is that:
historically tax cuts have been more successful than spending-based fiscal stimulus.
The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.
income
The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes.
income
In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income.
increases; increases
An IS curve shows combinations of:
interest rates and income that bring equilibrium in the market for goods and services.
The interest rate determines _____ in the goods market and money _____ in the money market.
investment spending; demand
According to the theory of liquidity preference, the supply of real money balances
is fixed by the central bank.
The Keynesian-cross analysis assumes planned investment:
is fixed, whereas the IS analysis assumes it depends on the interest rate.
John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:
low aggregate demand.
If the interest rate is above the equilibrium value, the:
supply of real balances exceeds the demand.
Two interpretations of the IS-LM model are that the model explains:
the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.
The IS-LM model takes _____ as exogenous.
the price level
In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:
unplanned inventory investment.
A decrease in the nominal money supply, other things being equal, will shift the LM curve:
upward and to the left.
The equilibrium condition in the Keynesian-cross analysis in a closed economy is:
actual expenditure equals planned expenditure.
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:
be smaller.
Both Keynesians and supply-siders believe a tax cut will lead to growth:
but Keynesians believe it works through aggregate demand, whereas supply-siders believe it works through incentive effects.
In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:
changes income, which changes consumption, which further changes income.
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.
decreases; downward
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:
drop by 2 percent.
The equilibrium of the Keynesian cross shows:
equality of planned expenditure and income in the short run.
The theory of liquidity preference states that, other things being equal, an increase in the real money supply will:
lower the interest rate.
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.
negatively; positively
The LM curve generally determines:
neither income nor the interest rate.
