ECON Chapter-11

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

upward and to the left.

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

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

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

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

increases by more than 250.

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

is fixed.

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

the interest rate and the level of income

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

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:

1,600.

Changes in monetary policy shift the:

LM curve.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

aggregate supply; aggregate demand

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.

Along any given IS curve:

both government spending and tax rates are fixed.

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

downward and to the left.

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

lower the interest rate.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. Select one:

national income; goods and services

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.

When Paul Volcker tightened the money supply:

nominal interest rates fell in the long run.

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

production

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

rise; decrease