Question 1

In the IS-LM model when M / P rises, 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

Accepted Answer

In the IS-LM model, an increase in M/P (real money supply) shifts the LM curve to the right, leading to a lower interest rate and higher output in the short-run equilibrium.

Question 2

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:
A)200.
B)300.
C)400.
D)500.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With MPC = 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, an increase in G by 200 shifts the IS curve to the right by 200 * 2.5 = 500.

Question 3

In the IS-LM model when M remains constant but P rises, 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

Accepted Answer

In the short-run, since the money supply remains constant but the price level (P) rises, the real money supply (M/P) must decrease. As a result, the demand for money (Md) exceeds the available money supply, leading to upward pressure on the interest rate (r). This is shown in the upward shift of the LM curve. As a higher interest rate implies a higher cost of borrowing, investment spending falls, leading to a decrease in the level of output. Therefore, the correct answer is A, as the interest rate rises and output falls.

Question 4

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

Accepted Answer

The answer of Exhibit: IS-LM Fiscal Policy  Based on...

Question 5

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 Bank of Canada should _____ the money supply, shifting to _____. A)increase; LM₂ B)decrease; LM₂ C)increase; LM₃ D)decrease; LM₃

Accepted Answer

The answer of Exhibit: Policy Interaction  Based on the...

Question 6

The interaction of the IS curve and the LM curve determines:
A)the price level and the inflation rate.
B)the level of output and the price level.
C)investment and the money supply.
D)the equilibrium level of the interest rate and output.

Accepted Answer

The IS-LM model represents the equilibrium in the goods and money markets, determining the interest rate and level of output where the IS curve (investment-savings) intersects with the LM curve (liquidity preference-money supply).

Question 7

In the IS-LM analysis, the increase in income resulting from a tax cut is _____ the increase in income resulting from an equal rise in government spending.
A)usually less than
B)usually greater than
C)usually equal to
D)sometimes less and sometimes greater than

Accepted Answer

In the IS-LM model, a tax cut increases disposable income, leading to higher consumption, but the multiplier effect is generally smaller than that of direct government spending, which directly increases aggregate demand.

Question 8

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, Y_2. B)r₃, Y_2. C)r₂, Y_3. D)r₃, Y_3.

Accepted Answer

The answer of Exhibit: IS-LM Monetary Policy  Based on...

Question 9

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

Accepted Answer

The answer of Exhibit: IS-LM Monetary Policy  Based on...

Question 10

In the IS-LM model when the Bank of Canada decreases the money supply, the public _____ bonds, and the interest rate _____, leading to a(n) _____ in investment and income. This is called the monetary transmission mechanism.
A)buy; rises; increase
B)sell; falls; decrease
C)sell; rises; decrease
D)buy; rises; decrease

Accepted Answer

When the Bank of Canada decreases the money supply, the public sells bonds to obtain money, causing the interest rate to rise. This increase in interest rates leads to a decrease in investment and income, illustrating the monetary transmission mechanism.

Question 11

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:
A)prices.
B)investment.
C)the money supply.
D)taxes.

Accepted Answer

In the IS-LM model, an increase in government spending shifts the IS curve to the right, leading to higher interest rates. This increase in interest rates can crowd out private investment, as borrowing costs become more expensive.

Question 12

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, Y_2. B)r₃, Y_2. C)r₂, Y_3. D)r₃, Y_3.

Accepted Answer

The answer of Exhibit: IS-LM Fiscal Policy  Based on...

Question 13

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

Accepted Answer

In the IS-LM analysis, if the LM curve is not horizontal, an increase in government spending leads to a decrease in investment demand due to the rise in interest rates. As a result, the overall increase in income (GDP) is less than the initial increase in government spending, leading to a smaller multiplier effect. Therefore, the multiplier for an increase in government spending is smaller than the multiplier in the Keynesian-cross analysis.

Question 14

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, Y_2. B)r₃, Y_2. C)r₂, Y_3. D)r₁, Y_2.

Accepted Answer

The answer of Exhibit: IS-LM Fiscal Policy  Based on...

Question 15

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 Bank of Canada should _____ the money supply, shifting to _____. A)increase; LM₂ B)decrease; LM₂ C)increase; LM₃ D)decrease; LM₃

Accepted Answer

The answer of Exhibit: Policy Interaction  Based on the...

Question 16

In the IS-LM model, changes in taxes initially affect planned expenditures through:
A)consumption.
B)investment.
C)government spending.
D)the interest rate.

Accepted Answer

In the IS-LM model, changes in taxes primarily affect consumption, which is a part of planned expenditures. When taxes are increased, consumers have less disposable income, reducing their ability to spend on goods and services. This reduction in consumption shifts the IS curve to the left, resulting in a decrease in equilibrium output and interest rates. Similarly, a decrease in taxes increases disposable income, leading to higher consumption and shifting the IS curve to the right, resulting in an increase in equilibrium output and interest rates.

Question 17

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 Bank of Canada 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

Accepted Answer

The answer of Exhibit: Policy Interaction  Based on the...

Question 18

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:
A)investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.
B)investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment.
C)investment is autonomous, whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate.
D)the price level is fixed, whereas in the IS-LM model it is allowed to vary.

Accepted Answer

The IS-LM model takes into account the effects of changes in the interest rate on investment, whereas the Keynesian-cross model assumes that investment is not affected by the interest rate. In the IS-LM model, a fiscal expansion raises the interest rate, which crowds out investment and reduces the overall impact on income. Therefore, the income response to a fiscal expansion is generally less in the IS-LM model compared to the Keynesian-cross model.

Question 19

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:
A)G / (1 - MPC).
B)more than zero but less than G / (1 - MPC).
C)G.
D)zero.

Accepted Answer

If the LM curve is vertical, then the interest rate is determined solely by the money market and is independent of income. Therefore, an increase in government spending would not affect the interest rate or the equilibrium level of income. Hence, the equilibrium level of income does not change, and the answer is zero.

Question 20

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:
A)100.
B)200.
C)300.
D)400.

Accepted Answer

The answer of If MPC = 0.6 (and there are...

Quiz 12: Aggregate Demand Ii: Applying the Islm Model

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

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:

The interaction of the IS curve and the LM curve determines:

In the IS-LM analysis, the increase in income resulting from a tax cut is _____ the increase in income resulting from an equal rise in government spending.

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:

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:

In the IS-LM model when the Bank of Canada decreases the money supply, the public ___ bonds, and the interest rate _, leading to a(n) ___ in investment and income. This is called the monetary transmission mechanism.

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

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:

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.

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:

In the IS-LM model, changes in taxes initially affect planned expenditures through:

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

Quiz 12: Aggregate Demand Ii: Applying the Islm Model

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____.

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:

The interaction of the IS curve and the LM curve determines:

In the IS-LM analysis, the increase in income resulting from a tax cut is _____ the increase in income resulting from an equal rise in government spending.

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:

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:

In the IS-LM model when the Bank of Canada decreases the money supply, the public _____ bonds, and the interest rate _____, leading to a(n) _____ in investment and income. This is called the monetary transmission mechanism.

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

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:

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.

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:

In the IS-LM model, changes in taxes initially affect planned expenditures through:

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate _ and output _.

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:

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:

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:

In the IS-LM model when the Bank of Canada decreases the money supply, the public ___ bonds, and the interest rate _, leading to a(n) ___ in investment and income. This is called the monetary transmission mechanism.

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:

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: