Question 1

One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _____ curve to the _____.

Accepted Answer

Cutting taxes increases disposable income, leading to higher consumption and investment, which shifts the IS curve to the right in the IS-LM model.

Question 2

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _____ output and _____ interest rates.

Accepted Answer

An increase in investment demand will shift the IS curve to the right, leading to an increase in both output and interest rates. The LM curve remains fixed, as it depends only on the money market. Therefore, an increase in investment demand will raise interest rates and output in the short run.

Question 3

In the IS-LM model, a decrease in the interest rate would be the result of a(n):

Accepted Answer

According to the IS-LM model, a decrease in the interest rate is the result of an increase in the money supply. This is because an increase in the money supply leads to an excess supply of money, which drives down the interest rate as individuals and firms seek to lend or invest the excess funds. This shift in the LM curve (representing the money market) leads to a new equilibrium in which both output and interest rates are lower.

Question 4

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level.

Accepted Answer

The answer of If the short-run IS-LM equilibrium occurs at...

Question 5

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____.

Accepted Answer

In the IS-LM model, a decline in investment and exports would decrease aggregate demand, shifting the IS curve to the left.

Question 6

In the IS-LM model, a decrease in output would be the result of a(n):

Accepted Answer

In the IS-LM model, a decrease in output is caused by a decrease in aggregate demand. An increase in money demand would cause a decrease in aggregate demand, as people would be willing to hold more money instead of spending it on goods and services. Therefore, an increase in money demand would lead to a decrease in output. The other options would either increase aggregate demand (decrease in taxes, increase in government purchases) or have no effect on aggregate demand (increase in money supply).

Question 7

One policy response to the economic slowdown in Canada in 2008-2009 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the _____ curve to the _____.

Accepted Answer

Increasing money growth typically shifts the LM curve to the right in the IS-LM model, indicating an increase in the money supply which lowers interest rates and stimulates investment and output.

Question 8

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates.

Accepted Answer

According to the IS-LM framework, an increase in the demand for money implies that people want to hold more money relative to the level of income and interest rates. This leads to a decrease in the supply of funds available for lending, which in turn leads to an increase in interest rates. The higher interest rates lead to a decrease in investment and consumption spending, which lowers the level of output. Thus, an increase in the demand for money will lower output and raise interest rates.

Question 9

An economic change that does not shift the aggregate demand curve is a change in:

Accepted Answer

Changes in the price level would shift the aggregate supply curve, but would not shift the aggregate demand curve. Changes in the money supply, investment function, and taxes would all shift the aggregate demand curve.

Question 10

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____.

Accepted Answer

The answer of A decrease in the price level shifts...

Question 11

An increase in consumer saving for any given level of income will shift the:

Accepted Answer

An increase in consumer saving means a decrease in consumption, which will lower the level of output for any given interest rate. This shift in consumption will cause a leftward shift of the IS curve.

Question 12

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

Accepted Answer

A higher price level results in a lower real money supply (M/P decreases), which raises the interest rate. Higher interest rates, in turn, reduce spending, leading to the downward slope of the aggregate demand curve.

Question 13

A change in income in the IS-LM model resulting from a change in the price level is represented by a _____ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a _____ aggregate demand curve.

Accepted Answer

A change in income resulting from a change in the price level is represented by a movement along the aggregate demand curve, as it reflects a change in the quantity demanded at different price levels. Conversely, a change in income in the IS-LM model for a given price level, which could result from fiscal or monetary policy, is represented by a shift in the aggregate demand curve, indicating a change in demand at all price levels.

Question 14

Exhibit: Short Run to Long Run  Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _____, with a _____ price level.

Accepted Answer

The answer of Exhibit: Short Run to Long Run ...

Question 15

Exhibit: Short Run to Long Run  Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level.

Accepted Answer

The answer of Exhibit: Short Run to Long Run ...

Question 16

A tax cut shifts the _____ curve to the right, and the aggregate demand curve _____.

Accepted Answer

A tax cut increases disposable income, leading to higher consumption and investment, which shifts the IS curve to the right, thereby increasing aggregate demand.

Question 17

Exhibit: IS-LM to Aggregate Demand  Based on the graph, which is the correct ordering of the price levels and money supplies?

Accepted Answer

The answer of Exhibit: IS-LM to Aggregate Demand  Based...

Question 18

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Accepted Answer

In the short run, the economy is producing above its natural rate of output, so there is a positive output gap. This leads to upward pressure on prices in the economy. However, in the long run, prices are flexible and will adjust to reflect the new level of output that is sustainable in the economy, which is at its natural rate. As prices fall, production will decrease until it reaches the natural rate of output. Therefore, output will decrease, and the price level will increase as the economy returns to its long-run equilibrium.

Question 19

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _____.

Accepted Answer

The answer of A movement along an aggregate demand curve...

Question 20

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____.

Accepted Answer

An increase in the money supply shifts the LM curve to the right because it leads to lower interest rates. This, in turn, stimulates investment and consumption spending, which shifts the aggregate demand curve to the right. Thus, the correct answer is C.

Quiz 12: Aggregate Demand Ii: Applying the Islm Model

One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _ curve to the _.

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, _ output and _ interest rates.

In the IS-LM model, a decrease in the interest rate would be the result of a(n) :

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _, shifting the _ curve to the right and returning output to the natural level.

The economic slowdown in Canada in 2014 can be explained in part by a decline in investment and exports. Both of these shocks can be represented in the IS-LM model by shifting the _ curve to the _.

In the IS-LM model, a decrease in output would be the result of a(n) :

One policy response to the economic slowdown in Canada in 2008-2009 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the _ curve to the _.

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _ output and _ interest rates.

An economic change that does not shift the aggregate demand curve is a change in:

A decrease in the price level shifts the _ curve to the right, and the aggregate demand curve _.

An increase in consumer saving for any given level of income will shift the:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ___ real money supply M / P, which _ the interest rate and ___ spending.

A change in income in the IS-LM model resulting from a change in the price level is represented by a _ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a _ aggregate demand curve.

Exhibit: Short Run to Long Run Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _, with a _ price level.

Exhibit: Short Run to Long Run Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _, with a _ price level.

A tax cut shifts the _ curve to the right, and the aggregate demand curve _.

Exhibit: IS-LM to Aggregate Demand Based on the graph, which is the correct ordering of the price levels and money supplies?

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _.

An increase in the money supply shifts the _ curve to the right, and the aggregate demand curve _.