Deck 4: Strong and Weak Policy Effects in the Is-Lm Model

Question 1

A change in the interest rate will generally affect the

A)level of investment.
B)level of consumption.
C)the amount of money people want to hold.
D)All of these.

Answer 1

All of these.

Question 2

"Real money balances" refers to

A)the currency part of the total money supply.
B)the money supply divided by the price level.
C)the money supply times one minus the interest rate.
D)the non-interest-earning part of the money supply.

Answer 2

the money supply divided by the price level.

Question 3

If the interest rate were to rise,we expect that

A)autonomous expenditures will rise.
B)the supply of money will fall.
C)the amount of money people want to hold will rise.
D)the amount of money people want to hold will fall.

Answer 3

the amount of money people want to hold will fall.

Question 4

An increase in real GDP causes the demand for real money balances to

A)rise.
B)fall.
C)remain unaffected.
D)rise,fall,or remain unaffected depending on the interest rate at the time.

Question 5

Holding nonmonetary assets and converting them to money when necessary is justifiable so long as

A)nonmonetary assets pay an interest rate above that available on money.
B)nonmonetary assets pay an interest rate below that available on money.
C)money,and not nonmonetary assets,are generally used in transactions.
D)money and nonmonetary assets are both used as bartering items.

Question 6

Which of the following statements would be true of an economy that can be characterized as being to the left of the IS curve?

A)There is an excess demand for commodities at the existing interest rate.
B)There will be a tendency for the level of output to decrease.
C)There is an excess supply of commodities at the existing interest rate.
D)There will be a tendency for interest rates to fall.

Question 7

In the early stages of macroeconomic model building,the money supply is regarded as a policy ________ that is under ________ control by the Federal Reserve.

A)goal,perfect
B)goal,imperfect
C)instrument,perfect
D)instrument,imperfect

Question 8

Autonomous planned spending includes five components of which two are dependent on the interest rates.These are

A)government spending and autonomous tax revenue.
B)the demand for exports and the demand for imports.
C)autonomous consumption and planned investment.
D)government spending and investment.

Question 9

The three functions of money are

A)store of value,medium of exchange,payment specie.
B)store of value,unit of account,bank settlement.
C)store of value,unit of account,to regulate the economy.
D)store of value,unit of account,medium of exchange.

Question 10

In the IS-LM model,equilibrium income can be affected by

A)fiscal policy alone.
B)monetary policy alone.
C)both fiscal and monetary policy.
D)neither monetary nor fiscal policy.

Question 11

The money supply consists of

A)currency alone.
B)currency and checking accounts.
C)checking and savings accounts.
D)currency and checking and savings accounts.
E)checking accounts alone.

Question 12

The economy is in short-run equilibrium

A)at any point on the IS curve.
B)only at the natural level of GDP.
C)at any point on the LM curve.
D)only at a point that is on both the IS and LM curves.

Question 13

Money is assumed to earn

A)no interest at all,being just currency in hand.
B)in checkable deposit form a rate below "the interest rate."
C)in checkable deposit form a rate equal to "the interest rate."
D)in checkable deposit form a rate above "the interest rate."

Question 14

On a money demand diagram with the interest rate on the vertical axis,the real money balance demand schedule would be a vertical line under the assumption that

A)a lower interest rate raises the demand for real money.
B)a lower interest rate lowers the demand for real money balances.
C)the interest rate has no effect on the demand for real money balances.
D)balances.
E)a higher real GDP raises the demand for real money balances.

Question 15

Factors that shift the demand schedule for money include all of the following EXCEPT

A)interest rate paid on money.
B)payment technology.
C)interest rate paid on non-money assets.
D)wealth.

Question 16

If there is unplanned inventory accumulation there is excess

A)demand for bonds.
B)supply of bonds.
C)demand for commodities.
D)supply of commodities.

Question 17

If there is unplanned inventory decumulation there is excess

A)demand for bonds.
B)supply of bonds.
C)demand for commodities.
D)supply of commodities.

Question 18

Which variable is assumed to remain exogenous in all the models constructed in Chapters 3 and 4?

A)the money supply
B)the interest rate
C)the price level
D)the equilibrium GDP
E)autonomous consumption

Question 19

As income and production rise,the demand for real money balances will ________ and interest rates will ________.

A)fall;fall
B)rise;rise
C)rise;fall
D)fall;rise

Question 20

If the level of interest rates paid on time deposits rise relative to that paid by money market accounts,ceteris paribus,individual will

A)reduce their real money balances.
B)first reduce then increase their real money balances.
C)increase their real money balances.
D)hold the same amount of money.

Question 21

Since the velocity of money increases as interest rates rise the

A)LM curve is negatively sloped.
B)IS curve is negatively sloped.
C)LM curve is positively sloped.
D)IS curve is positively sloped.

Question 22

Suppose that banks pay 4 percent interest on checking accounts while U.S.Savings Bonds pay 6 percent interest.Under these conditions

A)no nonmonetary assets are willingly held.
B)a combination of money and nonmonetary assets are willingly held.
C)no money balances are willingly held.
D)we do not have sufficient information to tell whether or not any money balances are willingly held.

Question 23

Along a downward-sloping money demand schedule,as the interest rate falls

A)the quantity of money demanded falls.
B)the quantity of money demanded rises.
C)real income rises.
D)real income falls.

Question 24

In deriving an LM curve,higher incomes shift the money demand schedule to the ________,yet the unchanged real money supply continues to be equally demanded so long as the interest rate ________.

A)right,rises
B)right,falls
C)left,rises
D)left,falls

Question 25

A change in the multiplier (k)will change the

A)slope of the IS curve.
B)slope and the position of the IS curve.
C)slope of the LM curve.
D)position of the LM curve.

Question 26

A decrease in real GDP causes

A)movement downward along a money demand schedule.
B)movement upward along a money demand schedule.
C)a rightward shift of the money demand schedule.
D)a leftward shift of the money demand schedule.

Question 27

Figure 4-2

Employing Figure 4-2 above,the money market is initially in equilibrium at point G and after the economy moves to equilibrium,the Federal Reserve increases the money supply by 500.We would observe

A)the interest rate first rises to 7.5% and Y to 3500.
B)the interest rate first rises to 7.5% then falls to 5%.
C)Y rises to 4000 as interest rates remain stable.
D)the economy moves from point G to C,to F then D.

Question 28

Moving upward along an LM curve,________ quantity of real money balances is equally demanded as higher real incomes are accompanied by ________ interest rates.

A)an increasing,rising
B)an increasing,falling
C)a decreasing,falling
D)a constant,rising
E)a constant,falling

Question 29

The money supply is controlled by the

A)New York Stock Exchange.
B)Federal Reserve System.
C)stock of gold in the economy.
D)President of the United States.

Question 30

Figure 4-4

In Figure 4-4 above,if the interest rate falls from 10% to 7.5% and this causes businesses to become more optimistic about future investment conditions,we would observe that planned investment would

A)decrease from B to C to D.
B)increase from B to C to D.
C)increase from B to C to F.
D)decrease from B to C to F.

Question 31

Suppose that we are at a point on the money demand schedule where (M/P)= 500.At a constant interest rate,the quantity of money demanded increases when real income ________ so that ________.

A)rises,the money demand schedule shifts to the right
B)rises,the money demand schedule shifts to the left
C)rises,we move downward along the money demand schedule
D)falls,the money demand schedule shifts to the left
E)falls,we move upward along the money demand schedule

Question 32

An increase in the money supply will

A)decrease the quantity of money held at every interest rate.
B)increase the quantity of money held at every interest rate.
C)shift the LM curve leftward.
D)None of the above.

Question 33

The use of money ________ barter,and ________ economic specialization.

A)eliminates the need for,increases
B)eliminates the need for,decreases
C)enhances the efficiency of,increases
D)enhances the efficiency of,decreases

Question 34

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P)= 600.Should Y rise to 4,200,the same quantity of real money balances

A)will not be demanded under any conditions.
B)will be demanded again provided the interest rate does not change.
C)will be demanded again provided the interest rate rises by a certain amount.
D)will be demanded again provided the interest rate falls by a certain amount.

Question 35

Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P)= 600.Should Y fall to 3,900,the same quantity of real money balances

A)will not be demanded under any conditions.
B)will be demanded again provided the interest rate does not change.
C)will be demanded again provided the interest rate rises by a certain amount.
D)will be demanded again provided the interest rate falls by a certain amount.

Question 36

The LM curve is the set of combinations of ________ such that ________.

A)interest rates and real money balances,real income equals real money balances times (1/r)
B)interest rates and real money balances,the money supply is equally demanded
C)real income and real money balances,the production of output is equally demanded
D)real income and interest rates,the production of output is equally demanded
E)real income and interest rates,the money supply is equally demanded

Question 37

If the proportion of GDP that people choose to hold in the form of money balances is 0.25,then a $100 increase in the money supply will lead to a rightward shift in the LM curve in the amount of

A)$400.
B)$ 25.
C)$ 75.
D)$100.

Question 38

Among all assets,only money can be a

A)unit of account.
B)store of value.
C)medium of exchange.
D)a way of amassing wealth.

Question 39

Suppose the government increases its expenditures by $100 million and finances the resulting deficit by selling bonds.Then the LM curve will

A)shift rightward.
B)shift leftward.
C)become steeper.
D)None of these.

Question 40

The "velocity" of money is

A)the ratio of real GDP to the real money supply.
B)the real money supply divided by the real GDP.
C)the money supply divided by the price level.
D)the money supply multiplied by the price level.

Question 41

Figure 4-3

Employing Figure 4-3 above,the initial equilibrium is point D and government expenditures increase by ________ shifting the IS curve from IS₀ to IS₁ and crowding out is approximately ________.

A)500,500
B)250,500
C)1000,1000
D)1000,250

Question 42

If spending is NOT responsive to changes in the interest rate,then the

A)LM curve is vertical.
B)IS and LM curves are vertical.
C)IS curve is vertical.
D)IS curve is vertical and the LM curve is horizontal.

Question 43

Which of the following would shift the LM curve?

A)an increase in the tax rate
B)an increase in the real money supply
C)a reduction in business confidence
D)All of these.

Question 44

During the recession phase of the business cycle,households become pessimistic about their future earning capacity as do banks.Nominal interest rates fall during recessions.Mortgage lending could be expected to

A)rise if the change in future earnings is thought to be greater than the change in interest payments.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest payments.

Question 45

On a diagram with "calories consumed per day" on the horizontal axis and "exercise per day" on the vertical axis,we can draw a line along which your body weight at this moment will remain constant.This line is analogous to how ________ for changing values of the variables on the two axes.

A)the IS curve holds income constant
B)the IS curve holds the demand for money constant
C)the LM curve holds the demand for money constant
D)the LM curve holds income constant

Question 46

Which of the following statements would be true for an economy that can be characterized as being to the right of its LM curve?

A)There is excess supply of money.
B)There is excess demand for money.
C)There will be a tendency for the level of output to increase.
D)There will be a tendency for the interest rate to decrease.

Question 47

From any point below the current LM curve,money market equilibrium can be restored by some combination of a ________ income and a ________ interest rate that ________ the demand for money.

A)higher,higher,increases
B)higher,lower,increases
C)higher,lower,reduces
D)lower,higher,increases
E)lower,higher,reduces

Question 48

When the demand for money becomes less responsive to changes in income,the LM curve becomes ________ and it also shifts to the ________.

A)flatter,left
B)flatter,right
C)steeper,left
D)steeper,right

Question 49

An increase in the money supply will raise equilibrium GDP if the

A)IS curve is not vertical.
B)IS curve is negatively sloped.
C)position of the IS curve depends on the level of real money balances.
D)position of the LM curve depends on the level of real money balances.

Question 50

A lower nominal money supply is equally demanded,given each interest rate,at a ________ level of income,meaning that the LM curve has shifted to the ________.

A)higher,left
B)higher,right
C)lower,left
D)lower,right

Question 51

There are no questions for this section.

Question 52

A change in the public's desire to hold money will

A)shift the IS curve.
B)change the slope of the IS curve.
C)shift the LM curve.
D)change the slope and position of the LM curve.

Question 53

Which of the following statements are true?

A)The smaller the responsiveness of money demand to a change in the interest rate,the steeper the LM curve.
B)The larger the responsiveness of money demand to a change in the interest rate,the flatter the LM curve.
C)If money demand is not responsive to a change in the interest rate,the LM curve will be horizontal.
D)Both A and B.

Question 54

A higher nominal money supply is equally demanded,given each level of income,at a ________ interest rate,meaning that the LM curve has shifted to the ________.

A)higher,left
B)higher,right
C)lower,left
D)lower,right

Question 55

"Since checking accounts now pay interest they should not be included in the money supply." Given that checks are the major medium of exchange,this statement is false because

A)checking accounts are primarily used for savings in the current year.
B)the interest rate on checking accounts is lower than on other accounts.
C)the demand for real balances is negatively related to interest rates.
D)money is money.

Question 56

Suppose the demand for money becomes less sensitive to changes in the interest rate.In moving along an LM curve,an increase in income must be accompanied by a ________ change in the interest rate than before,meaning that the LM curve has become ________.

A)greater,steeper
B)greater,flatter
C)smaller,steeper
D)smaller,flatter

Question 57

In deriving LM curves,holding the real money supply constant while raising real GDP causes us to

A)trace up along an LM curve.
B)trace down along an LM curve.
C)shift the LM curve to the right.
D)shift the LM curve to the left.

Question 58

At all points below the current LM curve,

A)the supply of output exceeds output demand.
B)the supply of output falls short of output demand.
C)the supply of money falls short of money demand.
D)the supply of money exceeds money demand.

Question 59

A change in interest rates ________,while a change in income ________ the real money demand schedule.

A)decreases;increases
B)has a large effect on;has no effect on
C)moves the economy along;shifts
D)shifts;moves along

Question 60

From any point above the current LM curve,money market equilibrium can be restored by some combination of a ________ income and a ________ interest rate.

A)higher,higher
B)higher,lower
C)lower,higher
D)lower,lower

Question 61

Moving upward along an LM curve,velocity ________ because ________ remains constant while ________ rises.

A)rises,real balances,real income
B)rises,the interest rate,the price level
C)rises,the interest rate,real balances
D)falls,real balances,real income
E)falls,real income,real balances

Question 62

From an initial IS-LM equilibrium with normally-sloped IS and LM curves,the money supply falls.At the new IS-LM equilibrium we have some combination of a ________ income and a ________ interest rate.

A)higher,higher
B)higher,lower
C)lower,higher
D)lower,lower

Question 63

During the expansion phase of the business cycle,households become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Mortgage lending could be expected to

A)rise if the change in future earnings is thought to be greater than the change in interest rates.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest rates.

Question 64

Suppose we have normally-sloped IS and LM curves intersecting at point A.Then a monetary policy change shifts the LM curve to the right.Directly below point A we find a point on the new LM curve that shows us

A)where the new IS-LM equilibrium occurs.
B)how much the interest rate must fall to raise planned expenditures to the new equilibrium income.
C)how much the interest rate must fall to by itself raise the demand for money by as much as the money supply has decreased.
D)how much income must rise to by itself raise the demand for money by as much as the money supply has increased.
E)how much the interest rate must fall to by itself lower the demand for money by as much as the money supply has decreased.

Question 65

Figure 4-5

In Figure 4-5 above,people would be trying to increase their holdings of money at

A)points A and E.
B)points B,E,and C.
C)point A.
D)points A and B.
E)point D.

Question 66

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending shifts the ________ by a horizontal distance equal to the change in government spending ________.

A)IS curve to the right,divided by the Chapter 3 multiplier
B)IS curve to the right,times the Chapter 3 multiplier
C)IS curve to the left,times the interest rate at the initial equilibrium
D)LM curve to the right,divided by the Chapter 3 multiplier
E)LM curve to the right,divided by the interest rate at the initial equilibrium

Question 67

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending takes us to a new equilibrium with ________ income and ________ interest rate.

A)higher,a higher
B)higher,a lower
C)an unchanged,a higher
D)an unchanged,a lower
E)lower,an unchanged

Question 68

The IS curve would be vertical if

A)the government's budget was balanced.
B)autonomous expenditures were insensitive to the interest rate.
C)the demand for money was insensitive to the interest rate.
D)the government increased the money supply.

Question 69

Which of the following would cause the IS curve to shift?

A)a change in the multiplier
B)a change in business or consumer confidence
C)an increase in autonomous tax revenue
D)All of these would shift the IS curve.

Question 70

In the IS-LM diagram,we are in "general equilibrium"

A)at all points.
B)at all points on the LM curve.
C)at all points on the IS curve.
D)only at the intersection of the IS and LM curves.

Question 71

If the marginal leakage rate is 0.2,then a $300 fall in autonomous planned expenditures will shift the IS curve leftward by the amount of

A)$300.
B)$1500.
C)$75.
D)$600.

Question 72

The September 11 attacks had the effect of shifting the

A)IS curve to the right.
B)IS curve to the left.
C)LM curve to the right.
D)LM curve to the left.

Question 73

Figure 4-5

In Figure 4-5,the commodity market is in equilibrium

A)at points B,C,and E.
B)at points A and E.
C)only at point E.
D)at points E and D.
E)at points A,B,E,and C.

Question 74

Figure 4-5

In Figure 4-5 above,at what point do we find the commodity market in equilibrium while the money market is not?

A)A
B)B
C)C
D)D
E)E

Question 75

The Chapter 3 multiplier,because it assumes an ________ interest rate,is usually an ________ of the fiscal policy multiplier in the IS-LM model.

A)endogenous,underestimate
B)endogenous,overestimate
C)exogenous,underestimate
D)exogenous,overestimate

Question 76

Figure 4-5

In Figure 4-5 above,suppose that real income is YB and the money market is in equilibrium.The interest rate at this point is ________ to support commodity market equilibrium,so that involuntary inventory changes are ________.

A)too low,positive
B)too low,negative
C)just right,zero
D)too high,positive
E)too high,negative

Question 77

During the recession phase of the business cycle,business firms become pessimistic about their future earning capacity as do banks.Nominal interest rates fall during recessions.Investment lending could be expected to

A)rise if the change in future earnings is thought to be greater than the change in interest payments.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest payments.

Question 78

Figure 4-5

In Figure 4-5 above,at what income would the interest rate that brings about money market equilibrium cause unwanted inventories of commodities to accumulate?

A)YA
B)YB
C)YE
D)YC

Question 79

When the marginal propensity to save declines,the

A)multiplier becomes larger and the IS curve becomes flatter.
B)marginal propensity to consume increases and there is no effect on the IS curve.
C)multiplier becomes larger and the IS curve becomes steeper.
D)multiplier declines and the IS curve becomes steeper.

Question 80

During the expansion phase of the business cycle,business firms become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Investment lending could be expected to

A)rise if the change in future earnings is thought to be greater than the change in interest rates.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest rates.