Question 1

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:
A) zero.
B) $25 billion.
C) $75 billion.
D) $100 billion.

Accepted Answer

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about $25 billion. This is because an increase in taxes reduces disposable income, which leads to a decrease in consumption and investment spending.

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.
A) increase; lower
B) increase; raise
C) lower; lower
D) lower; raise

Accepted Answer

An increase in investment demand will shift the IS curve to the right, which will lead to an increase in both output and interest rates. The increase in investment demand will increase the equilibrium level of output and also increase the demand for loanable funds, resulting in a higher interest rate.

Question 3

An increase in consumer saving for any given level of income will shift the:
A) LM curve upward and to the left.
B) LM curve downward and to the right.
C) IS curve downward and to the left.
D) IS curve upward and to the right.

Accepted Answer

An increase in consumer saving means that there is less consumption spending, which means a decrease in aggregate demand. This will cause a decrease in output and income, shifting the IS curve downward and to the left.

Question 4

Use the following to answer questions : Exhibit: Policy Interaction -(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM₂ B) decrease; LM₂ C) increase; LM₃ D) decrease; LM₃

Accepted Answer

An increase in government spending shifts the IS curve to the right, increasing the interest rate. To keep the interest rate constant, the Federal Reserve should increase the money supply, which shifts the LM curve to the right, matching option A.

Question 5

Use the following to answer questions : Exhibit: Policy Interaction -(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂ and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____. A) r₁, Y₂ B) r₂, Y₃ C) r₃, Y₃ D) r₃, Y₄

Accepted Answer

An increase in government spending shifts the IS curve to the right, leading to a higher equilibrium income and interest rate. Since the Federal Reserve does not change the money supply, the interest rate will increase to r₂ and the income will increase to Y₃. Thus, the new equilibrium combination of interest and income will be r₂, Y₃.

Question 6

Use the following to answer questions : Exhibit: Policy Interaction -(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM₂ B) decrease; LM₂ C) increase; LM₃ D) decrease; LM₃

Accepted Answer

In order to keep output constant after an increase in government spending that shifts the IS curve to IS₂, the Fed should decrease the money supply shifting the LM curve to LM₃. This is because the increase in government spending leads to an increase in the demand for money, which in turn leads to an increase in interest rates. By decreasing the money supply and therefore increasing interest rates, the Fed can offset the initial increase in government spending and keep output constant.

Question 7

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:
A) directly.
B) by lowering the interest rate so that investment spending increases.
C) by raising the interest rate so that investment spending increases.
D) by increasing government spending on goods and services.

Accepted Answer

According to the IS-LM model, an increase in the money supply will shift the LM curve to the right, which lowers the interest rate. This in turn stimulates investment spending, which increases the demand for goods and services through the multiplier effect. Therefore, the correct choice is B, as the increase in the money supply indirectly affects the demand for goods and services by lowering the interest rate and stimulating investment spending.

Question 8

In the IS-LM model, a decrease in the interest rate would be the result of a(n):
A) increase in the money supply.
B) increase in government purchases.
C) decrease in taxes.
D) increase in money demand.

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, as the money supply increases, the supply of loanable funds increases, leading to a decrease in the interest rate.

Question 9

In the IS-LM model, a decrease in output would be the result of a(n):
A) decrease in taxes.
B) increase in the money supply.
C) increase in money demand.
D) increase in government purchases.

Accepted Answer

In the IS-LM model, a decrease in output is caused by an increase in money demand. When there is an increase in money demand, interest rates rise, causing a decrease in investment and consumption spending, which in turn leads to a decrease in output.

Question 10

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.
A) increase
B) decrease
C) first increase and then decrease
D) first decrease and then increase

Accepted Answer

If Congress raises taxes, there will be a decrease in disposable income, consumption, and investment, which shifts the IS curve to the left. If the Fed does not want the interest rate to change, it must offset the leftward shift of the IS curve by increasing the money supply, which shifts the LM curve to the right. The net effect is a decrease in output and no change in interest rate. Therefore, the Fed must decrease the money supply.

Question 11

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.
A) increase; lower
B) increase; raise
C) lower; lower.
D) lower; raise

Accepted Answer

According to the IS-LM framework, an increase in the demand for money will lead to a reduction in output and an increase in interest rates. This is because an increase in the demand for money will lead to a reduction in spending, which in turn will reduce output (via the multiplier effect). At the same time, the increase in demand for money will raise interest rates as people will be willing to pay more to hold their desired level of money balances. Hence, the correct answer is D.

Question 12

If the demand for real money balances does not depend on the interest rate, then the LM curve:
A) slopes up to the right.
B) slopes down to the right.
C) is horizontal.
D) is vertical.

Accepted Answer

If the demand for real money balances does not depend on the interest rate, then the LM curve is vertical because changes in the interest rate will not affect the demand for money. This situation is known as a liquidity trap.

Question 13

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.
A) lower; lower
B) lower; higher
C) no change in; lower
D) no change in; higher

Accepted Answer

When Congress increases taxes to reduce the budget deficit while the Fed holds the money supply constant, it generally leads to lower income because the tax increase can reduce consumption and investment spending. With lower demand for goods and services, the economy might slow down, leading to lower income. Additionally, with lower demand in the economy, there's less demand for loans, which can lead to lower interest rates.

Question 14

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.
A) LM; right
B) LM; left
C) IS; right
D) IS; left

Accepted Answer

The U.S. recession of 2001, influenced by a declining stock market and terrorist attacks, can be represented in the IS-LM model by shifting the IS curve to the left. These events decreased investment and consumption, reducing aggregate demand, which is captured by a leftward shift of the IS curve.

Question 15

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.
A) buy; rises; increase
B) sell; falls; decrease
C) sell; rises; decrease
D) buy; rises; decrease

Accepted Answer

When the Federal Reserve decreases the money supply, people sell bonds to get liquidity, which increases the interest rate. Higher interest rates lead to a decrease in investment and income.

Question 16

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
A) increase
B) decrease
C) first increase and then decrease
D) first decrease and then increase

Accepted Answer

In the IS-LM model, an increase in taxes would shift the IS curve to the left, reducing income and output. To counteract this and hold income constant, the Fed would need to increase the money supply, which would shift the LM curve to the right, offsetting the leftward shift of the IS curve and stabilizing income.

Question 17

The monetary transmission mechanism works through the effects of changes in the money supply on:
A) the budget deficit.
B) investment.
C) government expenditures.
D) taxation.

Accepted Answer

The monetary transmission mechanism works through the effects of changes in the money supply on investment. When the central bank increases the money supply, interest rates drop making borrowing cheaper, and this encourages firms to increase investment spending. Conversely, when the central bank contracts the money supply, interest rates rise making borrowing more expensive, and this discourages firms from investing. Changes in the money supply do not directly influence the budget deficit, government expenditures, or taxation.

Question 18

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.
A) less than half as great as
B) approximately equal to
C) more than two times as great as
D) more than three times as great as

Accepted Answer

The answer of According to the macroeconometric model developed by...

Question 19

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
A) both consumption and investment remain unchanged.
B) consumption rises but investment falls.
C) investment rises but consumption falls.
D) both consumption and investment fall.

Accepted Answer

When the Fed raises the money supply to counteract the effects of higher taxes, it typically leads to lower interest rates. Lower interest rates make borrowing cheaper, which can encourage investment. However, higher taxes can reduce disposable income, leading to a potential decrease in consumption.

Question 20

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls

Accepted Answer

When M remains constant but P rises, the real money supply (M/P) falls. In the short run, this leads to a decrease in money demand, causing the interest rate to rise. As the interest rate rises, investment and consumption fall, leading to a decrease in output. Therefore, in the usual case, the interest rate rises and output falls.

Quiz 12: Aggregate Demand Ii: Applying the Is-Lm Model

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:

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.

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

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

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

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

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

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.

If the demand for real money balances does not depend on the interest rate, then the LM curve:

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to income and a interest rate.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the curve to the .

In the IS-LM model when the Federal Reserve decreases the money supply, people bonds and the interest rate , leading to a(n) __ in investment and income.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

The monetary transmission mechanism works through the effects of changes in the money supply on:

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate and output .