This Document Contains Chapters 20 to 21 Chapter 20 The ISLM Model 20.1 Determination of Aggregate Output 1) His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. A) John Maynard Keynes B) Sir John Hicks C) Milton Friedman D) Paul A. Samuelson Answer: A 2) Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining A) the hyperinflations of the 1920s. B) why the Great Depression occurred. C) the high unemployment in Great Britain before World War I. D) the high unemployment in Great Britain after World War II. Answer: B 3) Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation. A) aggregate output; wages B) aggregate output; employment C) wage rates; wages D) wage rates; employment Answer: B 4) Keynes was especially concerned with explaining the A) recession of 1920-21. B) low levels of output and employment during the Great Depression. C) strong economic growth of the 1920s. D) high unemployment in Great Britain during the 1920s. Answer: B 5) Keynes was especially concerned with explaining the ________ level of output and employment during the ________. A) low; 1920s B) low; 1930s C) high; 1920s D) high; 1930s Answer: B 6) In the simple Keynesian model, equilibrium aggregate output is determined by A) aggregate demand. B) aggregate supply. C) the national demand for labor. D) the price level. Answer: A 7) Keynes argued that the sum of the components that comprise aggregate demand A) could add up to an output smaller than the economy is capable of producing, thus resulting in less than full employment. B) could add up to an output greater than the economy is capable of producing, thus resulting in less than full employment. C) always equaled the output the economy is capable of producing. D) equaled the output the economy is capable of producing by definition. Answer: A 8) In the simple Keynesian model of aggregate output determination, an equilibrium level of output below that necessary to maintain full employment can be explained by A) minimum wage laws. B) a generous level of unemployment benefits. C) relatively low aggregate demand. D) relatively high prices. Answer: C 9) Under Keynesian analysis, aggregate demand can be written as A) Yad = C + I + G + NX. B) Yad = C + I + G - NX. C) Yad = C - I - G - NX. D) Yad = C + I - G - NX. Answer: A 10) The simple Keynesian model illustrates the idea that the economy can come to rest at a level of aggregate output A) only at the full employment level. B) below the full employment level. C) only when the price level is fixed. D) only when wages are stable. Answer: B 11) Keynes believed that an economy could attain an equilibrium level of output A) only at the full-employment level of output. B) below the full-employment level of output. C) only if the government took a "hands off" approach. D) only if prices were falling. Answer: B 12) Which of the following statements concerning Keynesian analysis is false? A) Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. B) Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied equals quantity of output demanded (Yad), that is, when Y = Yad. C) Keynes's analysis involves explaining why aggregate output is at a certain level by understanding what factors affect each component of aggregate demand and how the sum of these components could add up to an output smaller than the economy is capable of producing, resulting in less than full employment. D) Keynes's analysis explains how the price level will change when the total quantity of output supplied changes. Answer: D 13) Which of the following statements concerning Keynesian analysis are true? A) Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, federal government spending, and state and local government spending. B) Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied (aggregate output produced) equals quantity of output demanded (Yad), that is, when Y = Yad C) Keynes's analysis involves explaining why wage rates are at a certain level by understanding what factors affect labor demand and why this could cause output to be greater than the economy is capable of producing, resulting in high inflation. D) Keynes's analysis explains how the price level will change when the total quantity of output supplied changes. Answer: B 14) Because inflation was not a serious problem during the Great Depression, Keynes's analysis assumed A) that unemployment also was not a problem. B) that the money supply was fixed. C) that the price level was fixed. D) that monetary policy is not effective. Answer: C 15) Keynes reasoned that consumer expenditure is most closely related to A) the level of interest rates. B) the price level. C) disposable income. D) the marginal tax rate. Answer: C 16) In the Keynesian model of income determination, consumer expenditure includes spending by A) consumers on personal computers. B) businesses on personal computers. C) governments on personal computers. D) foreigners on domestic personal computers. Answer: A 17) The marginal propensity to consume (mpc) can be defined as the fraction of A) a change in income that is spent. B) a change in income that is saved. C) income that is spent. D) income that is saved. Answer: A 18) If the consumption function is expressed as C = a + mpc × YD, then "mpc" represents A) autonomous consumer expenditure. B) the marginal propensity to consume. C) the expenditure multiplier. D) disposable income. Answer: B 19) If the consumption function is expressed as C = a + mpc × YD, then "a" represents A) autonomous consumer expenditure. B) the marginal propensity to consume. C) the expenditure multiplier. D) disposable income. Answer: A 20) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $25. B) $70. C) $50. D) $100. Answer: C 21) If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $58. B) $64. C) $80. D) $100. Answer: C 22) Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals A) $80. B) $200. C) $800. D) $1000. Answer: D 23) Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals A) 0.2. B) 0.6. C) 0.8. D) 1.0. Answer: B 24) Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to A) $0. B) $200. C) $800. D) $1000. Answer: B 25) Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to A) 0.2. B) 0.4. C) 0.5. D) 0.6. Answer: C 26) Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is A) 0. B) 0.5. C) 0.65. D) 1. Answer: C 27) Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is A) 0. B) 0.15. C) 0.5. D) 0.75. Answer: D 28) Everything else held constant, if consumption expenditure falls by 160 when disposable income falls by 200, the mpc is A) 0. B) 0.2. C) 0.4. D) 0.8. Answer: D 29) Economists define investment as the purchase of A) a new physical asset such as a new machine or a new house. B) any physical asset, whether new or not, used by business to increase production. C) any physical asset used by business to increase production and the repurchase of common stock. D) business spending on capital and household spending on durable goods. Answer: A 30) Actual investment spending is comprised of two components: A) fixed investment and actual inventory investment. B) planned investment and fixed investment. C) unplanned investment and inventory investment. D) fixed business investment and fixed housing investment. Answer: A 31) Planned investment spending, a component of aggregate demand, is equal to A) fixed investment plus actual inventory investment. B) fixed investment plus unplanned inventory investment. C) fixed investment. D) fixed investment plus planned inventory investment. Answer: D 32) There are two types of investment: ________ investment—the spending by business firms on equipment and structures, and planned spending on residential houses—and ________ investment—spending by business firms on additional holdings of raw materials, parts, and finished goods. A) planned; gross B) planned; inventory C) fixed; gross D) fixed; inventory Answer: D 33) A fall in inventories is synonymous with ________ investment. A) negative fixed B) positive fixed C) positive inventory D) negative inventory Answer: D 34) A difference between inventory investment and fixed investment is that A) fixed investment is never unplanned. B) fixed investment is never planned. C) inventory investment is never unplanned. D) unplanned inventory investment is always zero. Answer: A 35) In the Keynesian cross diagram, the point at which the aggregate demand function crosses the 45 degree line indicates the A) level of full employment income. B) natural level of income. C) equilibrium level of income. D) autonomous level of income. Answer: C 36) Keynes mentioned two factors that influenced planned investment spending: A) interest rates and disposable income. B) interest rates and business expectations about the future. C) disposable income and business expectations about the future. D) interest rates and business expectations about inflation. Answer: B 37) Aggregate demand in an economy with no government or foreign trade is A) consumer expenditure plus actual investment. B) consumer expenditure plus planned investment. C) consumer expenditure plus inventory investment. D) consumer expenditure plus fixed investment. Answer: B 38) It is convenient to separate actual investment into two categories when explaining how the equilibrium level of aggregate output is determined. These two categories are ________ investment and ________ investment. A) planned; fixed B) financial; structural C) planned; unplanned D) planned; structural Answer: C 39) If unplanned investment is positive, firms will ________ production and output will ________. A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: B 40) If unplanned investment is negative, firms will ________ production and output will ________. A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: C 41) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production. A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: B 42) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production. A) below; negative B) above; negative C) below; positive D) above; positive Answer: A 43) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to lower production. A) below; negative B) above; negative C) below; positive D) above; positive Answer: D 44) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain positive and firms will continue to ________ production. A) below; lower B) above; lower C) below; raise D) above; raise Answer: B 45) In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production. A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: C 46) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain negative and firms will continue to ________ production. A) below; lower B) above; lower C) below; raise D) above; raise Answer: C 47) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________. A) lower; fall B) lower; rise C) raise; fall D) raise; rise Answer: D 48) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to raise production, and output will continue to rise. A) below; negative B) above; negative C) below; positive D) above; positive Answer: A 49) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to lower production, and output will continue to fall. A) below; negative B) above; negative C) below; positive D) above; positive Answer: D 50) An increase in unplanned inventory investment for the entire economy equals the excess of A) output over aggregate supply. B) output over aggregate demand. C) aggregate supply over output. D) aggregate demand over output. Answer: B 51) A decrease in unplanned inventory investment for the entire economy equals the excess of A) output over aggregate supply. B) output over aggregate demand. C) aggregate supply over output. D) aggregate demand over output. Answer: D 52) If aggregate demand is less than the level of aggregate output, then ________ inventory investment will be ________. A) planned; positive B) actual; positive C) actual; negative D) planned; negative Answer: B 53) If aggregate demand falls short of current output, business firms will ________ production to ________ inventories. A) cut; keep from accumulating B) expand; keep from accumulating C) cut; build up D) expand; build up Answer: A 54) If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________. A) accumulation; rise B) depletion; fall C) depletion; rise D) accumulation; fall Answer: D 55) If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories. A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: B 56) If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories. A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: D 57) When the level of unplanned inventory investment is equal to zero, the economy is A) in disequilibrium. B) in a recession. C) in equilibrium. D) overheating Answer: C 58) If aggregate demand equals output, A) the economy is in a recession. B) output will increase. C) output will fall. D) the economy is at its equilibrium level. Answer: D Situation 20-1 Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9. 59) Using the information in Situation 20-1, if aggregate output is equal to $10,000, then unplanned inventory investment equals A) -$1000 B) -$100 C) $0 D) $100 Answer: D 60) Using the information in Situation 20-1, if aggregate output equals $8,000, the unplanned inventory investment equals A) -$100 B) $0 C) $100 D) $500 Answer: A 61) Using the information in Situation 20-1, the equilibrium level of aggregate output is A) $900 B) $8,000 C) $9,000 D) $10,000 Answer: C 62) The expenditure multiplier is the ratio of the change in ________ to a change in the ________. A) equilibrium output; monetary base. B) the money supply; monetary base. C) the money supply; autonomous expenditure. D) equilibrium output; autonomous expenditure. Answer: D 63) The ratio of the change in aggregate output to a change in planned investment spending is called A) the marginal propensity to consume. B) autonomous consumer expenditure. C) the expenditure multiplier. D) unplanned inventory accumulation. Answer: C 64) The multiplier effect means that a given change in ________ expenditures will change equilibrium ________ by an amount ________ than the initial change in autonomous expenditures. A) autonomous; income; greater B) autonomous; income; less C) induced; income; greater D) induced; income; less Answer: A 65) If you know the value of the multiplier and the amount of a change in autonomous investment, you can calculate A) the change in the interest rate. B) the change in the money supply. C) the change in money demand. D) the change in equilibrium output. Answer: D 66) For a marginal propensity to consume of 0.75, the value of the multiplier is A) 0.25. B) 3.00. C) 3.75. D) 4.00. Answer: D 67) If the marginal propensity to consume is .9, the value of the multiplier is A) 0. B) 1. C) 9. D) 10. Answer: D 68) If the income multiplier is 2, the value of the marginal propensity to consume is A) 0.2. B) 0.5. C) 0.75. D) 1. Answer: B 69) If the income multiplier is 4, the value of the marginal propensity to consume is A) 0.2. B) 0.5. C) 0.75. D) 1. Answer: C 70) For every dollar increase in planned investment spending, aggregate output increases by ________. A) one dollar B) less than one dollar C) more than one dollar D) two dollars. Answer: C 71) Keynes believed that changes in autonomous spending were dominated by changes in A) consumer expenditure. B) autonomous consumer expenditure. C) investment spending. D) taxes. E) none of the above. Answer: C 72) Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism—factors he referred to as "animal spirits." A) unplanned investment spending B) actual investment spending C) planned investment spending D) autonomous consumer expenditures Answer: C 73) After witnessing the events in the Great Depression, Keynes took the view that an economy would continually suffer major output fluctuations because of the volatility of A) autonomous spending, particularly planned investment spending. B) induced spending, particularly consumer expenditures. C) autonomous spending, particularly consumer expenditures. D) autonomous spending, particularly government expenditures. Answer: A Situation 20-1 Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9. 74) Using the information contained in Situation 20-1, if autonomous consumption increases by $100, then equilibrium aggregate output will change by A) -$1,000. B) -$100. C) $100. D) $1,000. Answer: D 75) Using the information contained in Situation 20-1, if planned investment decreases by $100, the equilibrium aggregate output will change by A) -$1,000. B) $-100. C) $100. D) $1,000. Answer: A 76) In the simple Keynesian framework, declines in planned investment spending that produce high unemployment can be offset by raising A) taxes. B) government spending. C) consumer confidence. D) business confidence. Answer: B 77) The Keynesian framework indicates that government can play an important role in determining aggregate output by A) changing the level of government spending or taxes. B) raising consumer confidence. C) raising investor confidence. D) changing the money supply and interest rates. Answer: A 78) A tax cut initially A) increases consumption expenditure by an amount greater than the tax cut. B) increases consumption expenditure by an amount equal to the tax cut. C) increases consumption expenditure by an amount that is less than the value of the tax cut. D) has no effect on consumption expenditure. E) reduces consumption expenditure by an amount that is less than the value of the tax cut. Answer: C 79) Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit, then A) the rate of unemployment will increase. B) the level of aggregate output will increase. C) the price level will increase. D) the rate of interest will fall. Answer: A Situation 20-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9. 80) Using the information in situation 20-2, if government spending increases by $100, then the equilibrium aggregate output will change by A) -$1,000. B) -$100. C) $100. D) $1,000. Answer: D 81) Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium aggregate output will change by A) -$90. B) -$10. C) $10. D) $90. Answer: A 82) Using the information in situation 20-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by A) -$100. B) -$50. C) $50. D) $100. Answer: C 83) In a closed economy, aggregate demand is the sum of A) consumer expenditure, actual investment spending, and government spending. B) consumer expenditure, planned investment spending, and government spending. C) consumer expenditure, actual investment spending, government spending, and net exports. D) consumer expenditure, planned investment spending, government spending, and net exports. Answer: B 84) In an open economy, aggregate demand is the sum of A) consumer expenditure, actual investment spending, and government spending. B) consumer expenditure, planned investment spending, and government spending. C) consumer expenditure, actual investment spending, government spending, and net exports. D) consumer expenditure, planned investment spending, government spending, and net exports. Answer: D 85) If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by A) 100. B) 250. C) 400. D) 750. Answer: C 86) If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output increases by A) 250. B) 500. C) 750. D) 1000. Answer: D 87) If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output A) increases by 1000. B) increases by 750. C) decreases by 750. D) decreases by 1000. Answer: D 88) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: D 89) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to the level of taxes. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C 90) Aggregate output is increased by a decrease in A) autonomous consumption. B) government spending. C) planned investment. D) net taxes. Answer: D 91) Equilibrium output is reduced by an increase in A) planned investment. B) taxes. C) government spending. D) net exports. Answer: B 92) Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output. Answer: A fall in investment will reduce aggregate output by a greater amount that the initial fall in investment. This happens because of the multiplier effect. 93) Show algebraically that the balanced-budget multiplier (that is, a matching change in both government expenditure and net taxes) is equal to one. Answer: The multiplier for a change in government expenditure equals (1/1 – mpc) while the multiplier for net taxes equals (-mpc/1 – mpc) If government expenditure and taxes are changed in the same direction by the same amount, then the combined (balanced budget) multiplier is: 20.2 The ISLM Model 1) If the interest rate falls, other things being equal, investment spending will ________. A) fall B) rise C) either rise, fall, or remain unchanged D) not be affected Answer: B 2) When the interest rate rises, ________. A) planned investment falls B) planned investment rises C) planned investment will be unaffected D) equilibrium income increases Answer: A 3) When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________. A) high; few; high B) high; few; low C) low; few; high D) low; many; low E) high; many; high Answer: B 4) When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________. A) falls; less; fall B) falls; more; rise C) rises; more; fall D) rises; less; fall Answer: C 5) When interest rates fall in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________. A) falls; less; fall B) falls; less; rise C) falls; more; fall D) rises; less; fall Answer: B 6) An increase in interest rates ________. A) increases the value of the dollar, net exports, and equilibrium output B) increases the value of the dollar, reducing net exports and equilibrium output C) reduces the value of the dollar, net exports, and equilibrium output D) reduces the value of the dollar, increasing net exports and equilibrium output Answer: B 7) A decrease in interest rates ________. A) increases the value of the dollar, net exports, and equilibrium output B) increases the value of the dollar, reducing net exports and equilibrium output C) reduces the value of the dollar, net exports, and equilibrium output D) reduces the value of the dollar, increasing net exports and equilibrium output Answer: D 8) The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope. A) IS; upward B) IS; downward C) LM; downward D) LM; upward Answer: B 9) Points on the IS curve satisfy ________ market equilibrium. A) money B) goods C) stock D) bond Answer: B 10) The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded. A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B 11) The ________ describes points for which the goods market is in equilibrium. A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B 12) Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A 13) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D 14) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: A 15) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: D 16) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall. A) right; supply B) right; demand C) left; supply D) left; demand Answer: A 17) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to rise. A) right; supply B) right; demand C) left; supply D) left; demand Answer: D 18) The money market is in equilibrium ________. A) at any point on the IS curve B) at any point on the LM curve C) at only one point on the LM curve D) only at the intersection of the IS and LM curves Answer: B 19) The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied. A) IS curve B) LM curve C) consumption function D) investment schedule Answer: B 20) In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively Answer: B 21) According to the liquidity preference theory, the demand for money is ________ related to aggregate output and ________ related to interest rates. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C 22) As interest rates rise, the opportunity cost of holding money ________ and the demand for money ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: B 23) As aggregate output rises, the demand for money ________ and the interest rate ________, so that money demanded equals money supplied and the money market is in equilibrium. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A 24) Everything else held constant, if aggregate output is to the right of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D 25) Everything else held constant, if aggregate output is to the left of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A 26) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess supply of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: C 27) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess demand of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: B 28) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to fall. A) right; supply B) right; demand C) left; supply D) left; demand Answer: C 29) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to rise. A) right; supply B) right; demand C) left; supply D) left; demand Answer: B 30) The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand? Answer: Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount. 20.3 ISLM Approach to Aggregate Output and Interest Rates 1) Macroeconomic equilibrium requires ________. A) equilibrium in the goods market B) equilibrium in the money market C) equilibrium in both the goods and money markets D) equilibrium in neither the goods nor the money market Answer: C 2) When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________. A) aggregate output; price level B) aggregate output; interest rate C) money supply; price level D) consumer expenditures; interest rate Answer: B 3) If the economy is on the LM curve, but is to the right of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: D 4) If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: A 5) If the economy is on the IS curve, but is to the left of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B 6) If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C 7) If the economy is on the IS curve, but is to the left of the LM curve, then the ________ market is in equilibrium, but the interest rate is ________ the equilibrium level. A) goods; below B) goods; above C) money; below D) money; above Answer: B 8) If the economy is on the LM curve, but is to the right of the IS curve, then the ________ market is in equilibrium, but aggregate ________ exceeds aggregate ________. A) goods; output; demand B) goods; demand; output C) money; output; demand D) money; demand; output Answer: C Chapter 21 Monetary and Fiscal Policy in the ISLM Model 21.1 Factors That Cause The IS Curve to Shift 1) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: B 2) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D 3) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A 4) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: B 5) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: C 6) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: C 7) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: B 8) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; LM; left D) fall; IS; left Answer: B 9) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C 10) Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________. A) merely causes a movement along the IS curve and not a shift B) is crowded out by higher taxes C) is crowded out by higher government spending D) is crowded out by lower consumer expenditures Answer: A 11) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B 12) A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C 13) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D 14) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A 15) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: B 16) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: C 17) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: C 18) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: B 19) A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: B 20) An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B 21) A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) fall; IS; left C) fall; LM; left D) rise; IS; right Answer: B 22) The IS curve shifts to the left when ________. A) taxes increase B) government spending increases C) the money supply increases D) autonomous planned investment spending increases Answer: A 23) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant. A) raises; LM; right B) lowers; IS; left C) raises; IS; right D) lowers; LM; left Answer: C 24) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant. A) increases; increases; right B) increases; decreases; left C) decreases; increases; left D) decreases; decreases; left Answer: D 25) A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant. A) increases; increases; right B) increases; decreases; right C) decreases; increases; left D) decreases; decreases; left Answer: A 26) If American college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant. A) fall; LM B) fall; IS C) rise; LM D) rise; IS Answer: B 27) If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: A 28) An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant. A) cheaper; decline B) cheaper; rise C) more expensive; decline D) more expensive; rise Answer: B 29) An autonomous appreciation of the U.S. dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S. A) less; decreases B) less; increases C) more; decreases D) more; increases Answer: C 30) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: B 31) Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico. A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: A 32) A shift in tastes toward American goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: C 33) Everything else held constant, a shift in tastes in the U.S. towards American goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico. A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: D 34) A shift in tastes toward American goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C 35) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: B 36) A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: D 37) An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: A 38) Which of the following does not shift the IS curve? A) An increase in autonomous consumption. B) An increase in government spending. C) A decline in government spending. D) A fall in the interest rate. Answer: D 21.2 Factors That Cause the LM Curve to Shift 1) An increase in the money supply, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: D 2) If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C 3) If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: B 4) If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the right, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: C 5) If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the left, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: B 6) An increase in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises Answer: A 7) A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises Answer: D 8) An increase in the quantity of money supplied shifts the money supply curve to the ________ and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right Answer: B 9) A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right Answer: C 10) A decline in the money ________ shifts the LM curve to the ________, causing the interest rate to rise and output to fall, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: D 11) A decline in the money supply shifts the LM curve to the left, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B 12) An increase in the money ________ shifts the LM curve to the ________, causing the interest rate to fall and output to rise, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: C 13) An increase in the money supply shifts the LM curve to the right, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C 14) When the central bank ________ the money supply, the LM curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant. A) increases; fall; increases B) increases; rise; decreases C) decreases; rise; decreases D) decreases; fall; increases Answer: A 15) An autonomous decrease in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: D 16) An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: C 17) As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: A 18) An autonomous rise in ________ shifts the LM curve to the ________, everything else held constant. A) net exports; right B) net exports; left C) money demand; right D) money demand; left Answer: D 21.3 Changes in Equilibrium Level of the Interest Rate and Aggregate Output 1) In the ISLM framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B 2) An expansionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: D 3) Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: B 4) A contractionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: A 5) Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: C 6) In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C 7) In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B 8) In the ISLM framework, an expansionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A 9) In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C 10) Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall. A) monetary; monetary B) monetary; fiscal C) fiscal; monetary D) fiscal; fiscal Answer: C 11) Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes. A) positively; positively B) positively; negatively C) negatively; positively D) negatively; negatively Answer: B 12) An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant. A) fiscal; rise B) fiscal; fall C) incomes; rise D) incomes; fall Answer: A 13) Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if ________. A) consumer confidence decreases sharply B) there is an investment boom C) the money supply increases D) taxes are cut Answer: A 14) If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________. A) fiscal; expansionary B) fiscal; contractionary C) monetary; expansionary D) monetary; contractionary Answer: D 15) Which of the following statements concerning Keynesian ISLM analysis is true? A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. C) A fall in the money supply shifts the LM curve to the right. D) Expansionary fiscal policy will cause the interest rate to fall. Answer: A 16) Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government stimulus was overwhelmed by the continuing deterioration in credit market conditions. Everything else held constant and using the ISLM model, the net effect would cause the ________ curve to ________ and output will ________. A) IS; shift left; decrease B) IS; shift right; increase C) LM; shift right; increase D) LM shift left; decrease Answer: A 17) Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change? Answer: The monetary expansion shifts the LM curve to the right which by itself would cause the interest rate to decrease and aggregate output to increase. The fiscal contraction shifts the IS curve to the left which by itself would cause the interest rate to decrease and aggregate output to decrease. Therefore, the equilibrium interest rate unambiguously falls, while the effect on output is indeterminate. 18) Using the ISLM model, show graphically and explain the effects of a monetary contraction. What is the effect on the equilibrium interest rate and level of output? Answer: See figure below. The monetary contraction shifts the LM curve to the left. The result is that the equilibrium level of output falls and the equilibrium interest rate increases. 21.4 Effectiveness Of Monetary Versus Fiscal Policy 1) If the quantity of money demanded is not affected by changes in the interest rate, the LM curve is ________ and fiscal policy will be ________. A) horizontal; very effective B) horizontal; ineffective C) vertical; ineffective D) vertical; very effective Answer: C 2) The LM curve will be vertical and fiscal policy ineffective when ________. A) the demand for money is unaffected by changes in the interest rate B) the demand for money is unaffected by changes in income C) investment is unaffected by changes in the interest rate D) investment is unaffected by changes in income Answer: A 3) The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as ________. A) fiscal neutrality B) a recession C) complete crowding out D) inflation Answer: C 4) Crowding out will be more pronounced the closer to vertical is the ________. A) IS curve B) LM curve C) consumption function D) aggregate demand function Answer: B 5) The less interest-sensitive is money demand, the ________. A) more effective is fiscal policy relative to monetary policy B) more effective is monetary policy relative to fiscal policy C) steeper is the IS curve D) flatter is the LM curve Answer: B 6) The more interest-sensitive is money demand, the ________. A) more effective is fiscal policy relative to monetary policy B) more effective is monetary policy relative to fiscal policy C) steeper is the IS curve D) steeper is the LM curve Answer: A 7) If the economy is characterized by a certain and stable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; smaller B) a money supply; smaller C) a money supply; larger D) an exchange rate; larger Answer: B 8) If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; larger B) a money supply; smaller C) a money supply; larger D) an exchange rate; smaller Answer: C 9) If the ________ curve is relatively more unstable than the ________ curve, a money supply target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM Answer: B 10) If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM Answer: C 11) If the Fed adopts a policy of pegging the interest rate, a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________. A) fall; increasing B) fall; decreasing C) rise; decreasing D) rise; increasing Answer: D 12) Using the ISLM model, explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate. What is this effect called? Answer: See figure below. This is the total crowding out effect. The LM curve is vertical, so any shift of the IS curve affects only interest rates. The level of output is constant. The fiscal expansion shifts the IS curve rightward, increasing the interest rate. 13) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable. Answer: See figure below. Unstable money demand causes the LM curve to shift between LM' and LM". If the money supply is targeted, output fluctuates between Y' and Y". With an interest rate target, output remains stable at Y. Since the objective is to minimize output fluctuations, targeting the interest rate is preferable. 21.5 ISLM Model In The Long Run 1) The rate of output at which the price level has no tendency to rise or fall is called the ________. A) natural rate of output B) potential level of income C) bliss point D) efficient level of output Answer: A 2) In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; rise; left C) remains below; fall; left D) remains below; rise; right Answer: B 3) In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; fall; left C) remains below; fall; right D) remains below; rise; left Answer: C 4) In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called ________. A) interest rate overshooting B) long-run money neutrality C) long-run crowding out D) the long-run Phillips curve Answer: B 5) In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary monetary policy is to ________. A) increase real output and the interest rate B) not change either real output or the interest rate C) increase real output and leave the interest rate unchanged D) increase the interest rate and leave real output unchanged Answer: B 6) The long-run neutrality of money refers to the fact that in the long run, monetary policy ________. A) changes only real output B) changes only the real interest rate C) changes both real output and the real interest rate D) has no effect on either real output or the real interest rate Answer: D 7) In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate. A) increase; increase B) not change; not change C) increase; not change D) not change; increase Answer: D 8) In the long-run ISLM model and with everything else held constant, the long-run effect of a contractionary fiscal policy is to ________ real output and ________ the interest rate. A) not change; not change B) decrease; decrease C) decrease; not change D) not change; decrease Answer: D 9) In the long-run ISLM model and with everything else held constant, the long-run effect of a cut in government spending is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D 10) In the long-run ISLM model and with everything else held constant, the long-run effect of a tax cut is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: C 11) In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: C 12) In the long-run ISLM model and with everything else held constant, the long-run effect of a fall in net exports is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D 13) In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D 14) In the long-run the ISLM model predicts that ________ can change real output. A) only monetary policy B) only fiscal policy C) both monetary and fiscal policy D) neither monetary nor fiscal policy Answer: D 15) If the price level increases, everything else held constant, the ________ curve shifts to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: C 16) Using the long-run ISLM model, explain and demonstrate graphically the neutrality of money, for the case of an increase in the money supply. Answer: See figure below. The increase in the money supply shifts LM to the right, increasing output to Y', above the natural rate Y*. The interest rate falls from i to i' . Excess demand increases the price level, reducing the real value of the money supply. The LM curve shifts back until the all pressure on prices is eliminated by the return to the natural rate of output. The initial and final levels of output and interest rate are the same. No real variables have changed. 21.6 ISLM Model And The Aggregate Demand Curve 1) The relationship between the price level and the quantity of aggregate output for which the goods and money markets are in equilibrium is called the ________. A) IS curve B) LM curve C) aggregate demand curve D) production function Answer: C 2) If the price level decreases, everything else held constant, the ________ curve shifts to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: D 3) Everything else held constant, a decrease in the price level will ________. A) increase real aggregate output B) decrease real aggregate output C) increase aggregate demand D) decrease aggregate demand Answer: A 4) In deriving the aggregate demand curve a ________ in the price level leads to ________ in the real money supply because the nominal quantity of dollars can purchase ________ goods and services. A) decline; an increase; more B) decline; a decrease; more C) rise; an increase; fewer D) rise; a decrease; more Answer: A 5) In deriving the aggregate demand curve a ________ price level ________ the money supply in real terms, raises interest rates, and ________ the equilibrium level of aggregate output. A) higher; reduces; raises B) higher; reduces; lowers C) lower; increases; raises D) lower; increases; lowers Answer: B 6) The aggregate demand curve is downward sloping because a decrease in the price level increases the ________ money supply which ________ interest rates and increases the equilibrium level of aggregate output, everything else held constant. A) real; lowers B) real; raises C) nominal; lowers D) nominal; raises Answer: A 7) The aggregate demand curve has the usual downward slope, since a ________ price level ________ the real money supply, raises interest rates, and lowers the equilibrium level of aggregate output, everything else held constant. A) lower; reduces B) lower; increases C) higher; reduces D) higher; increases Answer: C 8) The aggregate demand curve has the usual downward slope, since a higher price level reduces the real money supply, ________ interest rates, and ________ the equilibrium level of aggregate output, everything else held constant. A) raises; lowers B) raises; raises C) lowers; lowers D) lowers; raises Answer: A 9) Everything else held constant, an increase in government spending will cause ________. A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A 10) Everything else held constant, expansionary monetary policies will cause ________. A) the quantity of aggregate demand to increase B) the quantity of aggregate demand to decrease C) aggregate demand to decrease D) aggregate demand to increase Answer: D 11) Everything else held constant, contractionary monetary policies will cause ________. A) the quantity of aggregate demand to increase. B) the quantity of aggregate demand to decrease. C) aggregate demand to increase. D) aggregate demand to decrease. Answer: D 12) Everything else held constant, a purchase of government securities by the Fed will cause ________. A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A 13) Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A 14) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D 15) Everything else held constant, an increase in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A 16) Everything else held constant, a decrease in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D 17) Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A 18) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D 19) Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D 20) Everything else held constant, a depreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A 21) Everything else held constant, a decrease in government spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Test Bank for The Economics of Money, Banking and Financial Markets Frederic S. Mishkin 9780321599797, 9780134734200, 9780133836790, 9780134734606, 9780134733821
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