Chapter 12 Final
(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 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.
B
(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
(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3
C
(Exhibit: IS-LM Fiscal Policy) Based on the graph, 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: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3
C
3. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease
C
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: A) 350. B) 400. C) 600. D) 750.
C
In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100
D
The interaction of the IS curve and the LM curve together determine: A) the price level and the inflation rate. B) the interest rate and the price level. C) investment and the money supply. D) the interest rate and the level of output.
D
Economic research finds that greater central-bank independence is ______ correlated with lower and more stable inflation as well as correlated with the average growth and variability of real GDP
strongly; not
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 200. B) 240. C) 250. D) 260.
D
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.
An LM curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income, which bring equilibrium in the market for real money balances. D) interest rates and income, which bring equilibrium in the market for goods and services.
C
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
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 Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.
C
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: A) 100. B) 200. C) 300. D) 400.
C
In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls
C
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
Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the:
proportion of firms with flexible prices
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 the money supply:
Lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run
Using the IS-LM/AD-AS model of Chapter 12 model, in the short run, a tac cut combined with tight money would lead to a:
Rise in the real interest rate and a fall in investment
If the short-run aggregate supply curve is steep, the Phillips curve will be:
Steep
All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:
The 25-percent reduction in the money supply between 1929 and 1933
Other things equal, a given change in money supply has a larger effect on demand the:
flatter the IS curve.
Other things equal, a given change in government spending has a larger effect on demand the
flatter the LM curve.
A time-inconsistency problem in macroeconomic policy can occur when the policymaker:
has direction to act as it seems best in each situation, based on his or her own knowledge and experience
Using the IS-LM/AD-AS model of Chapter 12, if Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the interest rate constant, then in the short run the two policies together would generally lead to ______ interest rate and a ______ income.
higher;lower
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
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.
lower; raises; reduces
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; rises; decrease
If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.
small; large
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.
(Exhibit: IS-LM Monetary Policy) Based on the graph, 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: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3
D
An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.
LM: shifts to the right
A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.
LM; does not shift
Each of the following conditions will tend to reduce the sacrifice ratio except when:
The concept of hysteresis accurately describes the impact of history on the natural rate of unemployment
If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:
Y = 1,600 - 3T - 100r + 4G.
Unlike a monetarist policy rule, an inflation target has the advantage of:
allowing the central bank unlimited discretion
Which of the following is an example of a fiscal policy that has no inside lag?
an ongoing unemployment insurance program
In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
falls; rises
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
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
responsiveness of money demand to the interest rate is small.
responsiveness of money demand to the interest rate is small.
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.
Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:
time-inconsistent policy
If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is
0.005.
Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy _____ percent of one year's GDP
20
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 IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by
50 and the interest rate falls by 0.5 percent
(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall
A
(Exhibit: IS-LM Monetary Policy) Based on the graph, 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: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3
A
(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 the interest rate constant the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3
A
An increase in income raises money ______ and ______ the equilibrium interest rate. A) demand; raises B) demand; lowers C) supply; raises D) supply; lowers
A
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
In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the
A
In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100
A
The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A) lower the interest rate. B) raise the interest rate. C) have no effect on the interest rate. D) first lower and then raise the interest rate.
A
(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies? A) P1 > P2 and M1 > M2 B) P1 > P2 and M1 < M2 C) P1 < P2 and M1 > M2 D) P1 < P2 and M1 < M2
B
(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
(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels of interest rates and real money balances are: A) r1 and M1/P1. B) r2 and M2/P2. C) r3 and M2/P2. D) r3 and M3/P3.
B
(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 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____. A) r1, Y2 B) r2, Y3 C) r3, Y3 D) r3, Y4
B
(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower
B
2. (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are: A) Y1 and PE1. B) Y2 and PE2. C) Y3 and PE3. D) Y3 and PE4.
B
A decrease in the price level, holding nominal money supply constant, will shift the LM curve: A) upward and to the right. B) downward and to the right. C) downward and to the left. D) upward and to the left.
B
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. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
B
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
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
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______. A) $1 billion; more than $1 billion B) $.75 billion; more than $.75 billion C) $.75 billion; $.75 billion D) $1 billion; $1 billion
B
The monetary transmission mechanism works through the effects of changes in the money supply on: A) the budget deficit. B) investment. C) government expenditures. D) taxation.
B
The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: A) consumption function. B) interest rate. C) price level. D) nominal money supply.
B
Using the IS-LM analysis, 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. A) larger than the multiplier B) the same as the multiplier C) smaller than the multiplier D) sometimes larger and sometimes smaller than the multiplier
C
(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
(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall
D
(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
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: A) 100. B) 200. C) 300. D) 400.
D
An increase in consumer saving for any given level of income will shift the:
IS curve downward and to the left
An increase in government spending raises income:
In the short run, but leaves it unchanged in the long run, while lowering investment
Based on the IS-LM/AD-AS model of Chapter 12, if the government wants to raise investment but keep output constant, it should:
adopt a loose monetary policy and a tight fiscal policy
If the government wants to raise investment but keep output constant, it should
adopt a loose monetary policy and a tight fiscal policy
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
If the demand for real money balances does not depend on the interest rate, then the LM curve:
vertical.
An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.
increase; raise
Fiscal policy has a relatively long ______ lag, and monetary policy has a relatively long ______ lag.
inside; outside
A liquidity trap occurs when:
interest rates fall so low that monetary policy is no longer effective.
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
If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
investment rises but consumption falls.
Using the IS-LM/AD-AS model of Chapter 12, 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 in the short run the two policies together would generally lead to _____ interest rate and a _____ income.
lower;lower
If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation, then the costs of reducing inflation will be _____ traditional estimates of the sacrifice ratio
much lower than
Assume the short-run Philips curve holds and that the central bank desires both low inflation and low unemployment and uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation and low unemployment policy, households and firms will __________ the central bank's announcement and _________________ their expectations of inflation.
not believe; not change
The Lucas critique argues that because the way people form expectations is based ______ on government policies, economists predict the effect of a change in policy without taking changing expectations into account.
partly; cannot
Arguments in favor of passive economic policy include all of the following except:
recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.
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
All of the following are requirements for reducing inflation without causing a recession except
the government's budget must be balanced
The interaction of the IS curve and the LM curve together determine
the interest rate and the level of output.
An economic change that does not shift the aggregate demand curve is a change in:
the price level
Anything that shifts long-run aggregate supply curve to the left would shift the long-run Phillips curve:
to the right
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