Question 1

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, it means that the interest rate is fixed and any increase in government spending will not affect the equilibrium level of income. Therefore, the answer is zero.

Question 2

Use the following to answer questions Exhibit: IS-LM Fiscal Policy -(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, Y₂ B) r₃, Y₂ C) r₂, Y₃ D) r₃, Y₃

Accepted Answer

B

Question 3

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls

Accepted Answer

D

Question 4

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

If the LM curve is not horizontal, it means that the interest rate changes when output (income) changes. In this case, the multiplier is smaller than the multiplier in the case of a horizontal LM curve. This is because an increase in government spending leads to a decrease in the supply of loanable funds, which increases the interest rate and reduces investment. As a result, the overall increase in aggregate demand is smaller, and the multiplier is smaller.

Question 5

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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, Y₂ B) r₃, Y₂ C) r₂, Y₃ D) r₃, Y₃

Accepted Answer

A tax cut shifts the IS curve to the right, leading to higher income (Y₃) and higher interest rate (r₂) in the new equilibrium.

Question 6

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

Accepted Answer

According to the IS-LM analysis, a tax cut increases the disposable income of consumers, which leads to an increase in consumption spending. However, some individuals may choose to save or pay off debt with the additional income, which limits the stimulative effect on the economy. On the other hand, an equal rise in government spending directly increases aggregate demand in the economy, leading to a larger increase in income. Therefore, the increase in income resulting from a tax cut is usually less than the increase in income resulting from an equal rise in government spending.

Question 7

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.
A) LM; left
B) LM; right
C) IS; left
D) IS; right

Accepted Answer

An increase in the money supply shifts the LM curve to the right in the IS-LM analysis. This is because a larger money supply will result in lower interest rates, which in turn encourages more investment and consumption spending, leading to an increase in aggregate demand.

Question 8

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 reason that the income response is less in the IS-LM model is due to the assumption that fiscal expansion raises the interest rate and crowds out investment, which is not accounted for in the Keynesian-cross model. The Keynesian-cross model assumes that investment is not affected by the interest rate, while the IS-LM model recognizes that higher interest rates discourage investment. Therefore, A is the best choice. B and C are incorrect because they reverse the impact of fiscal expansion on the interest rate and investment compared to what is assumed in the IS-LM model. D is also incorrect because the price level is allowed to vary in both models.

Question 9

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

Changes in taxes affect disposable income, which in turn affects consumption. As consumption is a component of planned expenditures in the IS-LM model, changes in taxes initially affect planned expenditures through consumption.

Question 10

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 11

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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 IS curve shifts to the right due to the increase in government spending, causing an increase in income from Y₁ to Y₃. However, the increase in demand for money causes the interest rate to rise from r₁ to r₂. Therefore, the new equilibrium combination of interest rate and income is r₂, Y₃.

Question 12

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

Accepted Answer

The IS curve represents the relationship between output and the interest rate, while the LM curve represents the relationship between the interest rate and the level of money supply. The intersection of the two curves determines the equilibrium level of output and interest rate in the economy. Thus, the correct answer is D, which states that the interaction of the IS curve and the LM curve together determines the equilibrium level of the interest rate and output.

Question 13

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.
A) decrease; decrease; decrease; decrease
B) increase; increase; increase; increase
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease

Accepted Answer

In the IS-LM model, a decrease in government purchases reduces planned expenditures, which leads to a decrease in total income. This in turn reduces money demand and ultimately leads to a decrease in the equilibrium interest rate.

Question 14

In the IS-LM model under the usual conditions 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 an increase in both output and the interest rate. This increase in interest rate leads to a decrease in investment, as it becomes more expensive for firms to borrow money. This is known as crowding out, as the increase in government spending crowds out private investment.

Question 15

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.
A) increase; supply
B) increase; demand
C) decrease; supply
D) decrease; demand

Accepted Answer

An increase in government purchases in the goods market leads to an increase in income, which in turn increases the demand for money as people want to hold more money for transactions and precautionary purposes. This does not affect the supply of money, which is determined by the central bank.

Question 16

The increase in income in response to a fiscal expansion in the IS-LM is:
A) always less than in the Keynesian-cross model.
B) less than in the Keynesian-cross model unless the LM curve is vertical.
C) less than in the Keynesian-cross model unless the LM curve is horizontal.
D) less than in the Keynesian-cross model unless the IS curve is vertical.

Accepted Answer

The answer of The increase in income in response to...

Question 17

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(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, Y₂ B) r₃, Y₂ C) r₂, Y₃ D) r₃, Y₃

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Question 18

In the IS-LM model when government spending 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 government spending shifts the IS curve to the right, indicating an increase in aggregate demand. This leads to higher output (or income) and higher interest rates in the short-run equilibrium, as the economy moves along the LM curve.

Question 19

In the IS-LM model when M rises but P remains constant, 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 the money supply (M) with a constant price level (P) leads to a rightward shift of the LM curve, which typically results in a lower interest rate and higher output in the short-run equilibrium.

Question 20

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(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

A decrease in the money supply shifts the LM curve to the left, resulting in a higher interest rate and lower income.

Quiz 12: Aggregate Demand Ii: Applying the Is-Lm Model

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

Use the following to answer questions Exhibit: IS-LM Fiscal Policy -(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 when taxation increases, in short-run equilibrium, the interest rate and output .

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.

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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:

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

If the money supply increases, then in the IS-LM analysis the curve shifts to the .

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:

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

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

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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 together determine:

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

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

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) in money .

The increase in income in response to a fiscal expansion in the IS-LM is:

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(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:

In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate and output .

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

Use the following to answer questions : Exhibit: IS-LM Monetary Policy -(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:

Quiz 12: Aggregate Demand Ii: Applying the Is-Lm Model

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

Use the following to answer questions Exhibit: IS-LM Fiscal Policy -(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 when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

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.

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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:

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

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

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:

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

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

Use the following to answer questions : Exhibit: IS-LM Fiscal Policy -(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: