Deck 22: Is-Lm in Action

Question 1

Monetary neutrality states that changes in the money supply affect only nominal variables.

Answer 1

True

Question 2

If output is below the natural rate, output eventually rises due to a fall in the price level and shift of LM to the right.

Answer 2

True

Question 3

If output starts at the natural rate, in the long run, changes in fiscal policy affect the interest rate but not output in the IS-LM model.

Answer 3

True

Question 4

If financial panics are the greatest concern for monetary policymakers, an interest rate target is superior to a money supply target.

Question 5

An increase in the price level affects the LM curve because of its impact on consumption.

Question 6

Any shift in IS or LM has an equivalent shift in AD.

Question 7

An increase in autonomous consumption leads to an increase in the equilibrium interest rate and equilibrium level of output in the IS-LM model.

Question 8

If the price level falls, equilibrium output rises and the equilibrium interest rate falls.

Question 9

The AD curve shifts in the same direction as the IS curve but the opposite direction from the LM curve.

Question 10

An increase in the real money supply shifts the LM curve to the right.

Question 11

Changes in monetary policy shift the LM curve, while changes in fiscal policy shift the IS curve.

Question 12

An increase in autonomous consumption shifts the LM curve to the right.

Question 13

During a financial panic, the LM curve shifts to the left.

Question 14

Crowding out requires a shift in the LM curve.

Question 15

When the LM curve is unstable, an interest rate target will produce greater stability in output.

Question 16

An increase in the interest rate causes the currency to appreciate and shifts the IS curve to the left.

Question 17

An increase in autonomous consumption has a greater impact on equilibrium output in the Keynesian cross model than the IS-LM model.

Question 18

If output is above the natural rate, the price level falls.

Question 19

A decrease in the real money supply leads to an increase in the equilibrium interest rate and equilibrium level of output in the IS-LM model.

Question 20

A decrease in output shifts the LM curve to the right.

Question 21

If the LM curve shifts to the right, the increase in equilibrium output will be mitigated if the monetary authority is targeting the interest rate.

Question 22

An increase in taxes causes equilibrium output to _____ and the equilibrium interest rate to

A) rise, rise.
B) rise, fall.
C) fall, rise.
D) fall, fall.

Question 23

An increase in autonomous consumption shifts AD to the right.

Question 24

When the Fed increases the money supply, the currency depreciates, nets exports rise and IS shifts to the right.

Question 25

A financial panic would cause _____ to shift to the right.

A) money demand
B) LM
C) AD
D) all of the above

Question 26

Crowding out implies that an increase in government spending affects only the price level and not output.

Question 27

The AD slopes down due to the affect of the price level on consumption.

Question 28

Equilibrium output will rise and the equilibrium interest rate will fall if

A) government spending increases.
B) the money supply increases.
C) exports increase.
D) all of the above.

Question 29

An increase in autonomous investment causes equilibrium output to _____ and the equilibrium interest rate to

A) rise, rise.
B) rise, fall.
C) fall, rise.
D) fall, fall.

Question 30

A decrease in government spending causes the _____ curve to shift to the

A) LM, right.
B) LM, left.
C) IS, right.
D) IS, left.

Question 31

The IS-LM model predicts that policy makers are greatly influential.

Question 32

The natural rate level of output is associated with

A) the Aggregate Demand and Supply model.
B) Hamilton's Law
C) IS-LM model.
D) none of the above.

Question 33

If autonomous consumption increases and the money supply increases, it is possible that the equilibrium interest rate will rise.

Question 34

The AD curve slopes upward because the LM curve shifts left.

Question 35

If the IS curve is unstable, output will be more stable if the monetary authority targets the money supply.

Question 36

The IS-LM model implies that output always returns to the natural rate in the long run.

Question 37

If output is below the natural rate then price level will _____, causing the _____ curve to shift right.

A) rise, IS
B) rise, LM
C) fall, IS
D) fall, LM

Question 38

A decrease in the money supply causes the _____ curve to shift to the left and equilibrium output to

A) LM, fall.
B) LM, rise.
C) IS, rise.
D) IS, rise.

Question 39

Movement up along the AD curve is associated with an increase in the interest rate.

Question 40

If the monetary authority wants to mitigate the effects of an unstable IS curve on output, it must accept the necessity of changes in the money supply.

Question 41

The price level will fall if output is _____ its natural rate.

A) above
B) below
C) equal to
D) cannot be determined

Question 42

Fiscal policy cannot raise output above the natural rate in the

A) short run.
B) long run.
C) both of the above.
D) neither of the above.

Question 43

Which of the following would cause a shift in the LM curve?

A) The government decreases Medicare benefits.
B) The government buys commercial paper.
C) The city government increases the sales tax.
D) All of the above.

Question 44

The AD curve

A) represents IS-LM equilibrium points.
B) shifts opposite from the IS or LM curves.
C) both a and b
D) none of the above

Question 45

A monetary policymaker is better off targeting the money supply when the _____ curve is unstable.

A) money demand
B) IS
C) LM
D) none of the above

Question 46

Crowding out refers to a diminishment of the output gain from fiscal stimulus due to

A) a lower money supply.
B) higher interest rates.
C) higher price level.
D) all of the above.

Question 47

The LM curve will shift to the left if output is_____ its natural rate.

A) above
B) below
C) equal to
D) cannot be determined

Question 48

The LM curve shifts because of changes in

A) the money demand.
B) inflation.
C) taxes.
D) none of the above.

Question 49

If investment spending is unstable, to stabilize output the central bank should target the

A) money supply.
B) interest rate.
C) reserve requirement
D) none of the above.

Question 50

The graph above shows an increase in government spending. Crowding out is apparent since the change in output from _____ is less than the change in output from

A) A to B, A to C.
B) B to C, A to C.
C) B to C, A to B.
D) none of the above.

Question 51

An increase in autonomous investment causes the ____ and _____ curves to shift to the right.

A) IS, LM
B) IS, AD
C) LM, AD
D) none of the above

Question 52

If money is neutral, then a tax cut would have the effect of

A) raising output.
B) raising the interest rate.
C) lowering the price level.
D) all of the above.

Question 53

During a financial panic, the use of Bagehot's Law is equivalent to the monetary authority targeting the _____ in the face of an unstable _____ curve.

A) interest rate, IS
B) interest rate, LM
C) money supply, IS
D) money supply, LM

Question 54

During a financial panic, the monetary authority should target the _____ and _____ it.

A) interest rate, raise
B) interest rate, lower
C) money supply, raise
D) money supply, lower

Question 55

Fiscal and monetary stimulus differ qualitatively in the effect on

A) output.
B) interest rates.
C) the price level.
D) unemployment.

Question 56

The natural rate of output is the level of output where

A) the price level has no tendency to change.
B) money supply growth is zero.
C) fiscal policy cannot shift the IS curve.
D) all of the above.

Question 57

In the IS-LM model, policy is said to be ineffective in the long run because it cannot change

A) the price level.
B) output.
C) the interest rate.
D) all of the above.

Question 58

A change in the price level shifts

A) IS.
B) LM.
C) AD.
D) all of the above.

Question 59

Which of the following is NOT a change in fiscal policy?

A) decrease the money supply
B) increase taxes
C) increase social security funding
D) All are changes in fiscal policy.

Question 60

Money neutrality implies that a change in the money supply only affects

A) output.
B) the price level.
C) unemployment.
D) none of the above.

Question 61

Explain what happens on an IS-LM graph when the Fed decreases the money supply that would show money neutrality.

Question 62

An increase in which of the following would shift IS to the right and AD to the left?

A) price level
B) government spending
C) investment
D) none of the above

Question 63

Explain the difference between fiscal policy and monetary policy.

Question 64

Show the effect of an increase on output on a graph of the supply and demand for money. What does this say about the LM curve?

Question 65

Using an IS-LM graph starting from the natural rate of output, show the impact of an increase in taxes in the short run and the long run. What does this say about the effectiveness of policy?

Question 66

Show the effect of an increase in (autonomous) investment on an IS-LM graph (in the short run).

Question 67

Explain why aggregate demand slopes down in terms of the IS-LM model.

Question 68

Government spending and the money supply both fall. As a result, the equilibrium interest rate must

A) rise.
B) fall.
C) stay the same.
D) cannot be determined.

Question 69

When the Fed increases the money supply, what happens to investment? How is this shown on an IS-LM graph?

Question 70

Would a steeper LM curve imply more crowding out or less? Explain with a graph (and words).

Question 71

Show a graph where an increase in the money supply and an increase in government spending lead to an increase in the equilibrium interest rate in the short run. What is required for this to happen?

Question 72

During the Great Depression, investment fell and the Fed allowed the money supply to fall. Show the effect on equilibrium output and the interest rate on an IS-LM graph.

Question 73

The Fed responds to a financial panic according to Bagehot's Law. Show the panic and the response on a graph of money supply and demand.