Question 1

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.

Accepted Answer

The LM curve is positively sloped because as interest rates rise, people and firms are incentivized to hold less money and put more of their funds into interest-earning assets. This leads to an increase in the velocity of money and a decrease in the demand for money. This relationship is captured by the LM equation, which shows that an increase in interest rates causes a decrease in the real money supply, leading to a higher equilibrium interest rate. Therefore, the LM curve is upward sloping.

Question 2

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.

Accepted Answer

The higher interest rate offered by U.S. Savings Bonds may incentivize some individuals to hold a combination of money and nonmonetary assets, as they may choose to invest in the bonds while still keeping some money in their checking accounts for more immediate spending needs.

Question 3

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.

Accepted Answer

Along a downward-sloping money demand schedule, as the interest rate falls, the opportunity cost of holding money (in terms of foregone interest) decreases, which makes holding money more attractive relative to other assets. As a result, people demand more money, which leads to an increase in the quantity of money demanded.

Question 4

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

Accepted Answer

Higher incomes lead to higher transactions demand for money, which shifts the money demand curve to the right. Since the real money supply is fixed, the equilibrium interest rate must rise to equate the demand for and supply of real money balances. Thus, the LM curve shifts to the right.

Question 5

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.

Accepted Answer

A change in the multiplier will change both the slope and the position of the IS curve. The IS curve represents all the possible combinations of interest rates and levels of output where planned investment equals saving. A change in the multiplier will affect planned investment and therefore shift the IS curve. Additionally, the multiplier is calculated as the reciprocal of the marginal propensity to save, which is one of the determinants of the slope of the IS curve. Therefore, a change in the multiplier will also affect the slope of the IS curve.

Question 6

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.

Accepted Answer

A decrease in real GDP leads to a decrease in money demand as there is reduced economic activity and spending. This results in a leftward shift in the money demand schedule as individuals and businesses demand less money at any given interest rate.

Question 7

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.

Accepted Answer

When the Federal Reserve increases the money supply by 500, the LM curve shifts down and to the right (from LM1 to LM2), leading to a decrease in the interest rate and an increase in output. Initially, the interest rate increases to 7.5% (point C), as the IS curve shifts left due to a decrease in investment spending (caused by higher interest rates). However, as output increases, the demand for money also increases, shifting the LM curve back up. The interest rate eventually falls to 5% (point D), and output increases to Y2 = 4000. Therefore, choice (B) is the correct answer.

Question 8

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

Accepted Answer

The answer of Moving upward along an LM curve,________ quantity...

Question 9

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.

Accepted Answer

The money supply is controlled by the Federal Reserve System, which is the central bank of the United States. The Federal Reserve regulates the amount of money in circulation by adjusting interest rates, setting reserve requirements for banks, and conducting open market operations. The New York Stock Exchange and the stock of gold in the economy do not directly control the money supply, and while the President of the United States can influence economic policy, they do not have direct control over the money supply.

Question 10

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.

Accepted Answer

A fall in interest rates generally makes borrowing cheaper, encouraging businesses to invest more. If businesses also become more optimistic, this further boosts investment, leading to an increase from B to C to F.

Question 11

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

Accepted Answer

When real income rises, people demand more money for transactions, leading to a rightward shift in the money demand schedule.

Question 12

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.

Accepted Answer

An increase in the money supply will lead to an increase in the quantity of money held at every interest rate, as more money will be available for lending and borrowing. This will lead to a rightward shift of the LM curve as the lower interest rates encourage more investment and borrowing, ultimately leading to an increase in output and income in the economy.

Question 13

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

Accepted Answer

The use of money eliminates the need for barter by providing a common medium of exchange, thus making trade more efficient. It also increases economic specialization by allowing individuals to focus on producing goods or services in which they have a comparative advantage, knowing they can trade for other goods and services they need.

Question 14

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.

Accepted Answer

When income (Y) increases, for the same quantity of real money balances to be demanded, the interest rate must rise. This is because higher income typically increases the demand for money for transaction purposes, which can be offset by a higher interest rate, making holding money less attractive compared to other assets.

Question 15

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.

Accepted Answer

The answer of Suppose that Y = 4,000 and we...

Question 16

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

Accepted Answer

The LM curve represents combinations of real income and interest rates where the demand for money equals the supply of money.

Question 17

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.

Accepted Answer

Given the proportion (k) of GDP people choose to hold in money balances is 0.25, the money multiplier is the reciprocal of this proportion, which is 1/0.25 = 4. Therefore, a $100 increase in the money supply leads to a 4 times increase in GDP, resulting in a $400 shift.

Question 18

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.

Accepted Answer

Money is uniquely characterized as a medium of exchange in the economy, facilitating transactions between buyers and sellers. Other assets can serve as a store of value, a unit of account, and a way of amassing wealth, but only money is universally accepted as a medium of exchange.

Question 19

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.

Accepted Answer

The LM curve represents the relationship between liquidity and money in the economy, focusing on the supply and demand for money at different interest rates. An increase in government expenditures financed by selling bonds primarily affects fiscal policy and the IS curve, not the LM curve directly.

Question 20

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.

Accepted Answer

The "velocity" of money is the rate at which money is exchanged in an economy. It is calculated as the ratio of real GDP to the real money supply, as it shows the speed at which money is changing hands in the economy to produce goods and services.

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

Since the velocity of money increases as interest rates rise the

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

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

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 change in the multiplier (k) will change the

A decrease in real GDP causes

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

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

The money supply is controlled by the

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

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 .

An increase in the money supply will

The use of money barter,and economic specialization.

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

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

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

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

Among all assets,only money can be a

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

The "velocity" of money is