Question 1

From an initial IS-LM equilibrium with normally-sloped IS and LM curves,the money supply falls.At the new IS-LM equilibrium we have some combination of a ________ income and a ________ interest rate.
A)higher,higher
B)higher,lower
C)lower,higher
D)lower,lower

Accepted Answer

When the money supply falls, the LM curve shifts up and to the left, leading to a higher equilibrium interest rate and a lower equilibrium income. Therefore, the correct combination is a lower income and a higher interest rate, which is only represented in option C.

Question 2

During the expansion phase of the business cycle,households become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Mortgage lending could be expected to
A)rise if the change in future earnings is thought to be greater than the change in interest rates.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest rates.

Accepted Answer

The answer of During the expansion phase of the business...

Question 3

Suppose we have normally-sloped IS and LM curves intersecting at point A.Then a monetary policy change shifts the LM curve to the right.Directly below point A we find a point on the new LM curve that shows us
A)where the new IS-LM equilibrium occurs.
B)how much the interest rate must fall to raise planned expenditures to the new equilibrium income.
C)how much the interest rate must fall to by itself raise the demand for money by as much as the money supply has decreased.
D)how much income must rise to by itself raise the demand for money by as much as the money supply has increased.
E)how much the interest rate must fall to by itself lower the demand for money by as much as the money supply has decreased.

Accepted Answer

The answer of Suppose we have normally-sloped IS and LM...

Question 4

Figure 4-5
 
-In Figure 4-5 above,people would be trying to increase their holdings of money at
A)points A and E.
B)points B,E,and C.
C)point A.
D)points A and B.
E)point D.

Accepted Answer

The answer of Figure 4-5
 
-In Figure 4-5 above,people would...

Question 5

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending shifts the ________ by a horizontal distance equal to the change in government spending ________.
A)IS curve to the right,divided by the Chapter 3 multiplier
B)IS curve to the right,times the Chapter 3 multiplier
C)IS curve to the left,times the interest rate at the initial equilibrium
D)LM curve to the right,divided by the Chapter 3 multiplier
E)LM curve to the right,divided by the interest rate at the initial equilibrium

Accepted Answer

An increase in government spending shifts the IS curve to the right. The amount of the shift is equal to the amount of the increase in government spending multiplied by the Chapter 3 multiplier. This is because an increase in government spending increases aggregate demand, which increases output and income, leading to a further increase in aggregate demand through the multiplier process. The LM curve does not shift in response to a change in government spending, as it is determined by the demand for money and the interest rate.

Question 6

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending takes us to a new equilibrium with ________ income and ________ interest rate.
A)higher,a higher
B)higher,a lower
C)an unchanged,a higher
D)an unchanged,a lower
E)lower,an unchanged

Accepted Answer

An increase in government spending shifts the IS curve to the right, leading to a new equilibrium with higher income and a higher interest rate due to the upward pressure on interest rates from increased demand for funds.

Question 7

The IS curve would be vertical if
A)the government's budget was balanced.
B)autonomous expenditures were insensitive to the interest rate.
C)the demand for money was insensitive to the interest rate.
D)the government increased the money supply.

Accepted Answer

The IS curve represents the equilibrium points in the goods market, where output (Y) equals expenditure (E). The interest rate (i) is the price at which investment expenditure adjusts to clear the goods market. If the autonomous expenditures (investment, government spending, exports, and imports) are insensitive to the interest rate, changes in the interest rate would have no effect on the equilibrium level of output, and the IS curve would be vertical.

Question 8

Which of the following would cause the IS curve to shift?
A)a change in the multiplier
B)a change in business or consumer confidence
C)an increase in autonomous tax revenue
D)All of these would shift the IS curve.

Accepted Answer

All three options, A, B, and C can cause the IS curve to shift. 
A change in the multiplier (option A) would occur if there were changes in investment or government spending. This would cause a shift in the IS curve. 
A change in business or consumer confidence (option B) would affect consumption and investment behavior, which would lead to changes in the IS curve. 
An increase in autonomous tax revenue (option C) would impact government spending and taxes, leading to shifts in the IS curve. Therefore, all three options would cause the IS curve to shift.

Question 9

In the IS-LM diagram,we are in "general equilibrium"
A)at all points.
B)at all points on the LM curve.
C)at all points on the IS curve.
D)only at the intersection of the IS and LM curves.

Accepted Answer

General equilibrium occurs when both the goods market (represented by the IS curve) and the money market (represented by the LM curve) are in balance. Therefore, general equilibrium can only occur at the intersection of the IS and LM curves.

Question 10

If the marginal leakage rate is 0.2,then a $300 fall in autonomous planned expenditures will shift the IS curve leftward by the amount of
A)$300.
B)$1500.
C)$75.
D)$600.

Accepted Answer

The shift in the IS curve is determined by the multiplier effect, which is calculated as 1/(1 - marginal leakage rate). With a marginal leakage rate of 0.2, the multiplier is 1/(1 - 0.2) = 1/0.8 = 1.25. Therefore, a $300 fall in autonomous planned expenditures results in a total decrease of 1.25 * $300 = $375. However, given the options provided, none directly match this calculation, suggesting a potential misunderstanding in the question's premise or a mistake in the calculation interpretation based on the options given. The closest option to the correct calculation is not listed, indicating a need for clarification.

Question 11

The September 11 attacks had the effect of shifting the
A)IS curve to the right.
B)IS curve to the left.
C)LM curve to the right.
D)LM curve to the left.

Accepted Answer

The September 11 attacks led to increased uncertainty and reduced confidence, causing a decrease in investment and consumption. This would shift the IS curve, which represents the relationship between interest rates and the level of income that brings the goods market into equilibrium, to the left.

Question 12

Figure 4-5
 
-In Figure 4-5,the commodity market is in equilibrium
A)at points B,C,and E.
B)at points A and E.
C)only at point E.
D)at points E and D.
E)at points A,B,E,and C.

Accepted Answer

The answer of Figure 4-5
 
-In Figure 4-5,the commodity market...

Question 13

Figure 4-5
 
-In Figure 4-5 above,at what point do we find the commodity market in equilibrium while the money market is not?
A)A
B)B
C)C
D)D
E)E

Accepted Answer

Point A represents a situation where the commodity market is in equilibrium, but the money market is not, typically due to a mismatch in money supply and demand.

Question 14

The Chapter 3 multiplier,because it assumes an ________ interest rate,is usually an ________ of the fiscal policy multiplier in the IS-LM model.
A)endogenous,underestimate
B)endogenous,overestimate
C)exogenous,underestimate
D)exogenous,overestimate

Accepted Answer

The answer of The Chapter 3 multiplier,because it assumes an...

Question 15

Figure 4-5
 
-In Figure 4-5 above,suppose that real income is YB and the money market is in equilibrium.The interest rate at this point is ________ to support commodity market equilibrium,so that involuntary inventory changes are ________.
A)too low,positive
B)too low,negative
C)just right,zero
D)too high,positive
E)too high,negative

Accepted Answer

The answer of Figure 4-5
 
-In Figure 4-5 above,suppose that...

Question 16

During the recession phase of the business cycle,business firms become pessimistic about their future earning capacity as do banks.Nominal interest rates fall during recessions.Investment lending could be expected to
A)rise if the change in future earnings is thought to be greater than the change in interest payments.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest payments.

Accepted Answer

The answer of During the recession phase of the business...

Question 17

Figure 4-5
 
-In Figure 4-5 above,at what income would the interest rate that brings about money market equilibrium cause unwanted inventories of commodities to accumulate?
A)YA
B)YB
C)YE
D)YC

Accepted Answer

At income level YC, the interest rate is too high, leading to reduced investment and consumption, causing unwanted inventories to accumulate as demand falls short of supply.

Question 18

When the marginal propensity to save declines,the
A)multiplier becomes larger and the IS curve becomes flatter.
B)marginal propensity to consume increases and there is no effect on the IS curve.
C)multiplier becomes larger and the IS curve becomes steeper.
D)multiplier declines and the IS curve becomes steeper.

Accepted Answer

When the marginal propensity to save declines, it implies that the marginal propensity to consume increases. This leads to a larger multiplier effect, as more income is being spent rather than saved, amplifying the impact of changes in investment or government spending on the overall economy. Consequently, the IS curve, which represents the relationship between interest rates and the level of income that brings the goods market into equilibrium, becomes flatter. This is because a larger multiplier means that a given change in interest rates leads to a larger change in income, hence a flatter slope.

Question 19

During the expansion phase of the business cycle,business firms become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Investment lending could be expected to
A)rise if the change in future earnings is thought to be greater than the change in interest rates.
B)stay the same.
C)fall.
D)fall if the change in future earnings is thought to be greater than the change in interest rates.

Accepted Answer

During the expansion phase, business firms are optimistic about their future earning capacity, which could lead to an increase in investment. If the change in future earnings is perceived to be greater than the change in interest rates, investment lending could be expected to rise. Therefore, Option A is the correct choice.

Question 20

Figure 4-5
 
-In Figure 4-5 above,the money market is in equilibrium
A)at points B,C,and E.
B)at points A and E.
C)only at point E.
D)at points E and D.
E)at points A,B,E,and C.

Accepted Answer

The answer of Figure 4-5
 
-In Figure 4-5 above,the money...

Quiz 4: Strong and Weak Policy Effects in the Is-Lm Model

From an initial IS-LM equilibrium with normally-sloped IS and LM curves,the money supply falls.At the new IS-LM equilibrium we have some combination of a income and a interest rate.

During the expansion phase of the business cycle,households become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Mortgage lending could be expected to

Suppose we have normally-sloped IS and LM curves intersecting at point A.Then a monetary policy change shifts the LM curve to the right.Directly below point A we find a point on the new LM curve that shows us

Figure 4-5 -In Figure 4-5 above,people would be trying to increase their holdings of money at

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending shifts the by a horizontal distance equal to the change in government spending .

Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending takes us to a new equilibrium with income and interest rate.

The IS curve would be vertical if

Which of the following would cause the IS curve to shift?

In the IS-LM diagram,we are in "general equilibrium"

If the marginal leakage rate is 0.2,then a $300 fall in autonomous planned expenditures will shift the IS curve leftward by the amount of

The September 11 attacks had the effect of shifting the

Figure 4-5 -In Figure 4-5,the commodity market is in equilibrium

Figure 4-5 -In Figure 4-5 above,at what point do we find the commodity market in equilibrium while the money market is not?

The Chapter 3 multiplier,because it assumes an interest rate,is usually an of the fiscal policy multiplier in the IS-LM model.

Figure 4-5 -In Figure 4-5 above,suppose that real income is YB and the money market is in equilibrium.The interest rate at this point is to support commodity market equilibrium,so that involuntary inventory changes are .

During the recession phase of the business cycle,business firms become pessimistic about their future earning capacity as do banks.Nominal interest rates fall during recessions.Investment lending could be expected to

Figure 4-5 -In Figure 4-5 above,at what income would the interest rate that brings about money market equilibrium cause unwanted inventories of commodities to accumulate?

When the marginal propensity to save declines,the

During the expansion phase of the business cycle,business firms become optimistic about their future earning capacity as do banks.Nominal interest rates rise during expansions.Investment lending could be expected to

Figure 4-5 -In Figure 4-5 above,the money market is in equilibrium