Question 1

When the demand for money depends only on real income,the resulting ________ LM curve causes fiscal policy to have a ________ effect on income.
A)vertical,very strong
B)vertical,zero
C)horizontal,very strong
D)horizontal,zero

Accepted Answer

When the demand for money depends only on real income, the resulting LM curve is vertical. This means that changes in the money supply will not affect the interest rate, and thus will have no effect on investment or consumption. As a result, fiscal policy will have a zero effect on income.

Question 2

A "easy" money,tight "fiscal" policy combination will be preferred by society which values
A)low growth rates,but more goods and services in the future.
B)public goods today greater than private goods in the future.
C)private goods today more than public goods in the future.
D)public and private goods in the future more than public and private goods today.

Accepted Answer

The answer of A "easy" money,tight "fiscal" policy combination will...

Question 3

The practice of "monetizing the debt" is traditionally feared because it is thought to cause
A)unemployment.
B)inflation.
C)a falling price level.
D)a liquidity trap.

Accepted Answer

Monetizing the debt refers to the practice of a country's central bank printing new money to purchase government debt. This increases the money supply in the economy and can lead to inflation as the value of the currency may decrease.

Question 4

A flat LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.

Accepted Answer

A flat LM curve suggests that the money market is highly sensitive to changes in income, meaning that interest rates do not increase much as income increases. This condition implies that fiscal policy (changes in government spending and taxes) will be very effective in changing output because the interest rate does not rise significantly to crowd out private investment. Therefore, changes in government spending and taxes will have a large multiplier effect on output.

Question 5

A vertical IS curve comes from the assumption that changes in the interest rate do NOT affect
A)money demand.
B)the money supply.
C)autonomous planned spending.
D)the LM curve.

Accepted Answer

A vertical IS curve implies that changes in the interest rate do not affect autonomous planned spending, meaning investment and consumption decisions are insensitive to interest rate changes. This is in contrast to the typical assumption that higher interest rates reduce investment and consumption.

Question 6

Suppose that changes in the interest rate have absolutely no effect on the demand for money.The resulting ________ LM curve causes monetary policy to have ________ effect in changing income.
A)horizontal,no
B)horizontal,an unusually strong
C)vertical,no
D)vertical,an unusually strong

Accepted Answer

The answer of Suppose that changes in the interest rate...

Question 7

Figure 4-9
 
-In Figure 4-9 above,suppose LMA shifts to LMB.The distance from points A to L tells us
A)the change in income given zero interest responsiveness of Ap.
B)the change in income resulting from the interest rate falling to its value at point B.
C)how much the money supply increased in producing the LM shift.
D)the change in income that by itself raises the demand for money by as much as the money supply rose.

Accepted Answer

The distance from points A to L represents the change in income that by itself raises the demand for money by as much as the money supply rose, which is what causes the LM curve to shift from LMA to LMB.

Question 8

According to Paul Krugman,during the past decade Japan's macroeconomic policy should have incorporated which of the following?
A)stimulatory monetary policy
B)stimulatory fiscal policy
C)monetization of the debt by the central bank
D)All of the above

Accepted Answer

According to Paul Krugman, during the past decade, Japan's macroeconomic policy should have incorporated stimulatory monetary policy, stimulatory fiscal policy, and monetization of the debt by the central bank. This is because Japan has been struggling with deflation and sluggish growth, and conventional policies such as lowering interest rates and government borrowing have not been effective. Therefore, Krugman advocates for a combination of monetary and fiscal stimulus, along with monetization of the debt if necessary, to boost aggregate demand and stimulate economic growth.

Question 9

In a "liquidity trap,"
A)the demand for money is infinite.
B)the LM curve is a vertical line.
C)the nominal interest rate on short-term assets is relatively high.
D)money supply changes have a strong impact on interest rates.

Accepted Answer

In a liquidity trap, the demand for money becomes infinite or extremely high at a very low or zero interest rate, meaning people prefer to hold cash because they expect no better return from bonds or other investments.

Question 10

A steep LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.

Accepted Answer

A steep LM curve implies that changes in government spending and taxes will have a small effect on output. This is because a steep LM curve means that interest rates are highly responsive to changes in the money supply. Therefore, the demand for money is highly inelastic, and monetary policy is less effective. This means that fiscal policy, such as changes in government spending and taxes, will have a small effect on output.

Question 11

Monetary restraint and fiscal stimulus will
A)both lower the real rate of interest.
B)both raise the real rate of interest.
C)have differing effects on the real rate of interest.
D)Both raise the level of output.

Accepted Answer

The answer of Monetary restraint and fiscal stimulus will
A)both lower...

Question 12

If the demand for money was totally independent of the interest rate,the LM curve would ________ and monetary policy would ________.
A)have a positive slope,quite powerful
B)have a positive slope,impotent
C)be vertical,quite powerful
D)be vertical,impotent

Accepted Answer

The answer of If the demand for money was totally...

Question 13

If spending is NOT responsive to changes in the interest rate,then
A)the Fed is "impotent."
B)tax policy is "impotent."
C)fiscal policy is "impotent."
D)the Fed is "potent."

Accepted Answer

If spending is not responsive to changes in the interest rate, then the Fed's monetary policy tool of adjusting interest rates becomes ineffective, making the Fed "impotent" in terms of stimulating or slowing down the economy through interest rate adjustments.

Question 14

If a 200 billion dollar increase in government spending occurs when the Fed seeks to maintain a fixed interest rate then
A)there is no crowding out,the LM curve shifts to offset the shift in the IS curve.
B)there is no crowding out,the monetary policy is fixes as is the LM curve fixed.
C)crowding out is assured since monetary policy is fixed.
D)crowding out is assured since the Fed will accommodate the spending increases.

Accepted Answer

If the Fed seeks to maintain a fixed interest rate, it will adjust the money supply to offset any increase in government spending in order to maintain the interest rate target. This will shift the LM curve, resulting in no crowding out.

Question 15

An increase in the real money supply will have its maximum effect on the equilibrium level of GDP when the
A)LM curve is vertical.
B)LM curve is horizontal.
C)IS curve is vertical.
D)IS curve is negatively sloped.

Accepted Answer

An increase in the real money supply will shift the LM curve to the right. When the LM curve is vertical, a shift to the right will have the maximum effect on the equilibrium level of GDP.

Question 16

Which of the following events occur when fiscal expansion is used without accommodating monetary policy?
A)Total government spending increases (or net taxes decrease).
B)Total private induced spending increases.
C)Private induced spending decreases.
D)A and B are both correct.

Accepted Answer

Fiscal expansion involves increasing government spending or decreasing taxes, which directly increases total government spending (A). This typically leads to an increase in aggregate demand, which can stimulate more private spending (B), as consumers and businesses respond to the improved economic conditions. However, without accommodating monetary policy (i.e., monetary policy that does not offset the fiscal expansion), interest rates may rise, potentially moderating the increase in private spending. Nonetheless, the initial effects are captured in options A and B.

Question 17

In a liquidity trap,the
A)IS curve is vertical.
B)IS curve is horizontal.
C)LM curve is vertical.
D)LM curve is horizontal.

Accepted Answer

In a liquidity trap, the LM curve is horizontal because interest rates are at or near zero, and changes in the money supply do not affect interest rates or output.

Question 18

From an initial IS-LM equilibrium with a normally-sloped IS curve and a vertical LM curve,the money supply increases.A the new IS-LM equilibrium we have
A)higher income and a lower interest rate.
B)higher income and an unchanged interest rate.
C)an unchanged income and a lower interest rate.
D)lower income and an unchanged interest rate.
E)an unchanged income and a higher interest rate.

Accepted Answer

When the money supply increases, the LM curve shifts to the right. As a result, the new equilibrium occurs at the intersection of a flatter IS curve and a steeper LM curve. This leads to a lower interest rate and a higher level of income. Therefore, the correct answer is A, higher income and a lower interest rate.

Question 19

A "tight" money,easy "fiscal" policy combination will be preferred by society which values
A)low growth rates,but more goods and services in the future.
B)public goods today greater than private goods in the future.
C)private goods today more than public goods in the future.
D)public and private goods in the future more than public and private goods today.

Accepted Answer

A "tight" money policy typically involves higher interest rates to control inflation, which can slow down economic growth. An "easy" fiscal policy involves increased government spending or lower taxes to stimulate the economy. This combination suggests a preference for public goods today (due to the fiscal stimulus) over private goods in the future, as the tight money policy may limit private investment and consumption growth.

Question 20

During the 1990s,Japan's economy experienced
A)a tripling of values in the stock market.
B)negligible inflation and unemployment rates.
C)falling short-term interest rates.
D)All of the above.

Accepted Answer

The answer of During the 1990s,Japan's economy experienced
A)a tripling of...

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

When the demand for money depends only on real income,the resulting LM curve causes fiscal policy to have a effect on income.

A "easy" money,tight "fiscal" policy combination will be preferred by society which values

The practice of "monetizing the debt" is traditionally feared because it is thought to cause

A flat LM curve implies that

A vertical IS curve comes from the assumption that changes in the interest rate do NOT affect

Suppose that changes in the interest rate have absolutely no effect on the demand for money.The resulting LM curve causes monetary policy to have effect in changing income.

Figure 4-9 -In Figure 4-9 above,suppose LMA shifts to LMB.The distance from points A to L tells us

According to Paul Krugman,during the past decade Japan's macroeconomic policy should have incorporated which of the following?

In a "liquidity trap,"

A steep LM curve implies that

Monetary restraint and fiscal stimulus will

If the demand for money was totally independent of the interest rate,the LM curve would and monetary policy would .

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

If a 200 billion dollar increase in government spending occurs when the Fed seeks to maintain a fixed interest rate then

An increase in the real money supply will have its maximum effect on the equilibrium level of GDP when the

Which of the following events occur when fiscal expansion is used without accommodating monetary policy?

In a liquidity trap,the

From an initial IS-LM equilibrium with a normally-sloped IS curve and a vertical LM curve,the money supply increases.A the new IS-LM equilibrium we have

A "tight" money,easy "fiscal" policy combination will be preferred by society which values

During the 1990s,Japan's economy experienced