Question 1

Assume that the money demand function is (M / P)^d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P = 2, and the Bank of Canada wants to fix the interest rate at 7 percent, it should set the money supply at: A)2,000. B)1,800. C)1,600. D)1,400.

Accepted Answer

To find the money supply, substitute r = 7 into the money demand function: (M / P)^d = 2,200 - 200(7) = 800. Since P = 2, M = 800 * 2 = 1,600.

Question 2

Assume that the money demand function is (M / P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A)drop by 4 percent. B)drop by 2 percent. C)drop by 1 percent. D)remain unchanged.

Accepted Answer

Using the initial equation: (M/P)^d = 2,200 - 200r Substituting M and P with their given values: (2,000/2)^d = 2,200 - 200r Simplifying: ^d = 2,200 - 200r ^d = 1100 - 100r To find the initial equilibrium interest rate, we set money demand equal to money supply: 1100 - 100r = 2000/2 1100 - 100r = 1000 -100r = -100 r = 1 Therefore, the initial equilibrium interest rate is 1%. If the money supply is raised to 2,800, then the new equation for money demand becomes: (2,800/2)^d = 2,200 - 200r 1,400^d = 2,200 - 200r 7^d = 11 - r Setting this new equation equal to the new money supply of 2,800: 7^d = 2,800/2 7^d = 1,400 ^d = 200 Substituting this value into the new equation for money demand: 7(200) = 11 - r r = 1.6 Therefore, the new equilibrium interest rate is 1.6%, which is a decrease of 0.4 percentage points, or 2%. The correct answer is B.

Question 3

Assume that the money demand function is (M / P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent. A)2 B)4 C)6 D)8

Accepted Answer

Firstly, we substitute the given values in the money demand function to get: (2000/2)^d = 2,200 - 200r => 1000^d = 2,200 - 200r => ^d = 2.2 - 0.2r Next, we equate the money supply to money demand to get the equilibrium interest rate: M/P = (M/P)^d => 2000/2 = (1000^d)(2) => 1000^d = 1000 => ^d = 1 Substituting this value in ^d = 2.2 - 0.2r, we get: 1 = 2.2 - 0.2r => 0.2r = 1.2 => r = 6 Therefore, the equilibrium interest rate is 6 percent.

Question 4

The interest rate determines _____ in the goods market and money _____ in the money market.
A)government spending; demand
B)government spending; supply
C)investment spending; demand
D)investment spending; supply

Accepted Answer

The interest rate affects investment spending, which is a component of aggregate demand in the goods market. As interest rates decrease, investment spending increases, leading to an increase in aggregate demand. In the money market, the interest rate affects the quantity of money demanded, not the quantity of money supplied.

Question 5

The LM curve generally determines:
A)income.
B)the interest rate.
C)both income and the interest rate.
D)neither income nor the interest rate.

Accepted Answer

The answer of The LM curve generally determines:
A)income.
B)the interest rate.
C)both...

Question 6

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

Accepted Answer

The answer of How can the government expenditure multiplier be...

Question 7

The intersection of the IS and LM curves determines the values of:
A)r, Y, and P, given G, T, and M.
B)r, Y, and M, given G, T, and P.
C)r and Y, given G, T, M, and P.
D)p and Y, given G, T, and M.

Accepted Answer

The intersection of the IS and LM curves determines the equilibrium interest rate (r) and output (Y) in the goods and money markets, given fiscal policy (G, T), money supply (M), and price level (P).

Question 8

Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.7 in each country. Country A decides to increase spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater?

Accepted Answer

The answer of Two identical countries, Country A and Country...

Question 9

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2 / 3 (Y - T). Planned investment is 300, as are government spending and taxes.
a.If Y is 1,500, what is planned spending? What is inventory accumulation or decumulation? Should equilibrium Y be higher or lower than 1,500?
b.What is equilibrium Y?
c.What are equilibrium consumption, private saving, public saving, and national saving?
d.How much does equilibrium income decrease when G is reduced to 200? What is the multiplier for government spending?

Accepted Answer

The answer of Consider a closed economy to which the...

Question 10

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:
A)170.
B)200.
C)250.
D)350.

Accepted Answer

The equilibrium level of income (Y) is determined by the intersection of the aggregate expenditure (AE) curve and the 45-degree line. The AE curve is given by AE = C + I + G, where C is consumption, I is planned investment, and G is government spending. Substituting the given values, we get AE = 200 + 0.7 (Y - 100) + 100 + G. Setting AE equal to Y and solving for G, we get G = 170.

Question 11

In the money market, an increase in the money supply:
A)lowers income.
B)raises income.
C)has no effect on income.
D)lowers velocity.

Accepted Answer

An increase in the money supply typically lowers interest rates, which can stimulate investment and consumption, leading to an increase in income.

Question 12

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:
A)350.
B)600.
C)950.
D)1,100.

Accepted Answer

The answer of In the Keynesian-cross analysis, if the consumption...

Question 13

The IS-LM model is generally used:
A)only in the short run.
B)only in the long run.
C)both in the short run and in the long run.
D)in determining the price level.

Accepted Answer

The IS-LM model is primarily used to analyze the short-run relationship between interest rates and real output in the goods and money markets.

Question 14

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a.What is the numerical formula for the IS curve?

Accepted Answer

The answer of Assume that the consumption function is given...

Question 15

The diagram below shows how a rise in government expenditure (G) shifts the IS curve from IS₁ to IS₂. What are the levels of investments in Y₁ and Y₂ for a fixed r?

Accepted Answer

The answer of The diagram below shows how a rise...

Question 16

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:
A)not change.
B)be smaller.
C)be bigger.
D)be equal to 1.

Accepted Answer

When taxes are made a function of income (T = T + tY), the marginal propensity to consume out of disposable income decreases because a portion of any additional income is taxed away. This results in a smaller multiplier for government purchases compared to a case where t (the marginal tax rate) is zero, because less of each dollar of government spending translates into consumer spending.

Question 17

Equilibrium levels of income and interest rates are _____ related in the goods and services market, and equilibrium levels of income and interest rates are _____ related in the market for real money balances.
A)positively; positively
B)positively; negatively
C)negatively; negatively
D)negatively; positively

Accepted Answer

In the goods and services market, higher levels of income lead to an increase in demand for goods and services, which in turn leads to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are negatively related in the goods and services market.

In the market for real money balances, higher levels of income lead to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are positively related in the market for real money balances.

Question 18

Assume that money demand is given by (M / P)^d = 0.5Y - 100r, and (M / P)^s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

Accepted Answer

The answer of Assume that money demand is given by...

Question 19

The IS and LM curves together generally determine:
A)income only.
B)the interest rate only.
C)both income and the interest rate.
D)income, the interest rate, and the price level.

Accepted Answer

The IS curve shows the combinations of the interest rate and income at which planned spending equals output, while the LM curve shows the combinations of the interest rate and income at which money demand equals money supply. Together, they determine both the equilibrium level of income and the equilibrium interest rate in the economy. Therefore, the correct choice is C, which states that both income and the interest rate are determined by the IS and LM curves. The price level is not necessarily determined by these curves and may be affected by other factors such as changes in production costs or changes in aggregate demand.

Question 20

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:
A)0.
B)100.
C)150.
D)250.

Accepted Answer

The answer of According to the Keynesian-cross analysis, if the...

Quiz 11: Aggregate Demand I: Building the Islm Model

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P = 2, and the Bank of Canada wants to fix the interest rate at 7 percent, it should set the money supply at:

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent.

The interest rate determines _ in the goods market and money _ in the money market.

The LM curve generally determines:

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

The intersection of the IS and LM curves determines the values of:

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T) . If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

In the money market, an increase in the money supply:

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T) , and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

The IS-LM model is generally used:

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200. a.What is the numerical formula for the IS curve?

The diagram below shows how a rise in government expenditure (G) shifts the IS curve from IS₁ to IS₂. What are the levels of investments in Y₁ and Y₂ for a fixed r?

Equilibrium levels of income and interest rates are _ related in the goods and services market, and equilibrium levels of income and interest rates are _ related in the market for real money balances.

Assume that money demand is given by (M / P)^d = 0.5Y - 100r, and (M / P)^s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

The IS and LM curves together generally determine:

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

Quiz 11: Aggregate Demand I: Building the Islm Model

Assume that the money demand function is (M / P) d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P = 2, and the Bank of Canada wants to fix the interest rate at 7 percent, it should set the money supply at:

Assume that the money demand function is (M / P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Assume that the money demand function is (M / P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent.

The interest rate determines _____ in the goods market and money _____ in the money market.

The LM curve generally determines:

How can the government expenditure multiplier be reinterpreted in terms of the marginal propensity to save MPS = 1 - MPC?

The intersection of the IS and LM curves determines the values of:

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T) . If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

In the money market, an increase in the money supply:

In the Keynesian-cross analysis, if the consumption function is given by C = 20 + 0.7 (Y - T) , and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

The IS-LM model is generally used:

Assume that the consumption function is given by C = 200 + 0.5 (Y - T), and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200. a.What is the numerical formula for the IS curve?

The diagram below shows how a rise in government expenditure (G) shifts the IS curve from IS1 to IS2. What are the levels of investments in Y1 and Y2 for a fixed r?

Equilibrium levels of income and interest rates are _____ related in the goods and services market, and equilibrium levels of income and interest rates are _____ related in the market for real money balances.

Assume that money demand is given by (M / P)d = 0.5Y - 100r, and (M / P)s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.

The IS and LM curves together generally determine:

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P = 2, and the Bank of Canada wants to fix the interest rate at 7 percent, it should set the money supply at:

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Assume that the money demand function is (M / P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent.

The interest rate determines _ in the goods market and money _ in the money market.

The diagram below shows how a rise in government expenditure (G) shifts the IS curve from IS₁ to IS₂. What are the levels of investments in Y₁ and Y₂ for a fixed r?

Equilibrium levels of income and interest rates are _ related in the goods and services market, and equilibrium levels of income and interest rates are _ related in the market for real money balances.

Assume that money demand is given by (M / P)^d = 0.5Y - 100r, and (M / P)^s equals 800. a.Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.