Question 1

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

Accepted Answer

Monetary neutrality is the concept that in the long run, changes in the money supply only affect nominal variables (such as prices and wages) and have no effect on real variables (like real GDP, employment, or real consumption).

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.

Accepted Answer

When output is below the natural rate, it typically leads to a fall in the price level. This decrease in the price level increases the real money supply (since the nominal money supply is fixed by the central bank), leading to a rightward shift of the LM curve in the IS-LM model. This shift lowers interest rates, stimulates investment, and increases output towards its natural rate.

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.

Accepted Answer

In the long-run framework of the IS-LM model, changes in fiscal policy (such as changes in government spending or taxes) can affect the interest rate due to shifts in the demand for money or loanable funds. However, output returns to its natural rate, which is determined by factors such as technology and resources, not by fiscal policy. This is because, in the long run, prices are flexible, allowing the economy to adjust back to its potential output.

Question 4

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

Accepted Answer

An interest rate target allows monetary policymakers to adjust the interest rate to stabilize the economy during financial panics, providing more flexibility and immediate response compared to a money supply target, which may not adapt quickly enough to changing economic conditions.

Question 5

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

Accepted Answer

The LM curve represents the relationship between the liquidity preference (demand for money) and the money supply in the economy, and it is affected by changes in income and the interest rate, not directly by changes in the price level or consumption.

Question 6

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

Accepted Answer

A shift in the IS curve (investment-savings) or the LM curve (liquidity preference-money supply) affects the aggregate demand (AD) curve because both IS and LM determine the equilibrium level of income and interest rates, which in turn influence 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.

Accepted Answer

An increase in autonomous consumption shifts the IS curve to the right, leading to a higher equilibrium output and interest rate in the IS-LM model.

Question 8

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

Accepted Answer

A fall in the price level increases the real value of money, leading to lower interest rates and increased investment and consumption, which in turn raises equilibrium output.

Question 9

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

Accepted Answer

The answer of The AD curve shifts in the same...

Question 10

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

Accepted Answer

An increase in the real money supply, holding everything else constant, reduces interest rates for any given level of income, leading to an outward (rightward) shift of the LM curve in the IS-LM model. This reflects the increased availability of money relative to the demand for it, lowering the equilibrium interest rate at each level of income.

Question 11

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

Accepted Answer

Monetary policy affects the money supply and interest rates, influencing the LM curve, which represents the equilibrium in the money market. Fiscal policy, through government spending and taxation, affects aggregate demand, shifting the IS curve, which represents the equilibrium in the goods market.

Question 12

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

Accepted Answer

An increase in autonomous consumption affects the IS curve by shifting it to the right, not the LM curve. The LM curve represents the relationship between liquidity preference and money supply in the economy, which is not directly affected by changes in autonomous consumption.

Question 13

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

Accepted Answer

A financial panic typically leads to a decrease in the money supply or an increase in the demand for money, causing the LM curve, which represents the relationship between the interest rate and the level of income that equates the money market, to shift to the left.

Question 14

Crowding out requires a shift in the LM curve.

Accepted Answer

Crowding out is primarily associated with a shift in the IS curve due to increased government spending and higher interest rates, not a shift in the LM curve.

Question 15

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

Accepted Answer

An interest rate target can stabilize output by adjusting the money supply to offset shifts in the LM curve, maintaining equilibrium in the money market.

Question 16

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

Accepted Answer

The answer of An increase in the interest rate causes...

Question 17

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

Accepted Answer

In the Keynesian cross model, an increase in autonomous consumption leads to a higher multiplier effect on equilibrium output compared to the IS-LM model. This is because the Keynesian cross model assumes a fixed price level, while the IS-LM model allows for changes in the price level. As a result, in the Keynesian cross model, an increase in autonomous consumption leads to a higher increase in aggregate demand, which in turn leads to a greater increase in equilibrium output.

Question 18

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

Accepted Answer

If output is above the natural rate, it typically leads to an increase in the price level due to higher demand and potential overheating of the economy, not a fall in the price level.

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.

Accepted Answer

A decrease in the real money supply would lead to an increase in the equilibrium interest rate but a decrease in the equilibrium level of output in the IS-LM model, as higher interest rates discourage investment and consumption.

Question 20

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

Accepted Answer

A decrease in output would shift the LM curve to the left, as it represents a lower demand for money at any given interest rate, indicating a higher interest rate is needed to equilibrate the money market at lower levels of income or output.

Quiz 22: Is-Lm in Action