1.

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

A.

low levels of capital.

B.

an untrained labor force.

C.

inadequate technology.

D.

low aggregate demand.



2.

The IS-LM model takes ______ as exogenous.

A.

the price level and national income

B.

the price level

C.

national income

D.

the interest rate



3.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

A.

national income; goods and services

B.

the price level; goods and services

C.

national income; money

D.

the price level; money



4.

For the purposes of the Keynesian cross, planned expenditure consists of:

A.

planned investment.

B.

planned government spending.

C.

planned investment and government spending.

D.

planned investment, government spending, and consumption expenditures.



5.

When drawn on a graph with Y along the horizontal axis and E along the vertical axis, the line showing planned expenditures rises to the:

A.

right with a slope less than one.

B.

right with a slope greater than one.

C.

left with a slope less than one.

D.

left with a slope greater than one.



6.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

A.

income equals consumption plus investment plus government spending.

B.

planned expenditure equals consumption plus planned investment plus government spending.

C.

actual expenditure equals planned expenditure.

D.

actual saving equals actual investment.



7.

The Keynesian cross shows:

A.

determination of equilibrium income and the interest rate in the short run.

B.

determination of equilibrium income and the interest rate in the long run.

C.

equality of planned expenditure and income in the short run.

D.

equality of planned expenditure and income in the long run.



8.

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount DG and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

A.

one unit.

B.

DG.

C.

DG divided by the quantity one minus the marginal propensity to consume.

D.

DG multiplied by the quantity one plus the marginal propensity to consume.



9.

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

A.

increases the amount of money in the economy.

B.

changes income, which changes consumption, which further changes income.

C.

is government spending and, therefore, more powerful than private spending.

D.

changes the interest rate.



10.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

A.

increase by 100

B.

increase by more than 100

C.

decrease by 100

D.

increase, but by less than 100



11.

After the Kennedy tax cut in 1964, real GDP:

A.

fell and unemployment rose.

B.

rose and unemployment fell.

C.

and unemployment both rose.

D.

and unemployment both fell.



12.

The Keynesian-cross analysis assumes planned investment:

A.

is fixed and so does the IS analysis.

B.

depends on the interest rate and so does the IS analysis.

C.

is fixed, whereas the IS analysis assumes it depends on the interest rate.

D.

depends on the interest rate and so does the IS analysis.



13.

The simple investment function shows that investment ______ as ______ increases.

A.

decreases; the interest rate

B.

increases; the interest rate

C.

decreases; government spending

D.

increases; government spending



14.

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

A.

is vertical.

B.

is horizontal.

C.

slopes upward and to the right.

D.

slopes downward and to the right.



15.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

A.

downward and to the left.

B.

upward and to the right.

C.

upward and to the left.

D.

downward and to the right.



16.

An interpretation of why the IS curve slopes downward and to the right is that as income rises, national saving rises, and this increase drives the interest rate:

A.

down, thereby decreasing investment.

B.

down, thereby increasing investment.

C.

up, thereby decreasing investment.

D.

up, thereby increasing investment.



17.

When the LM curve is drawn, the quantity that is held fixed is:

A.

the nominal money supply.

B.

the real money supply.

C.

government spending.

D.

the tax rate.



18.

The theory of liquidity preference implies that:

A.

as the interest rate rises, the demand for real balances will fall.

B.

as the interest rate rises, the demand for real balances will rise.

C.

the interest rate will have no effect on the demand for real balances.

D.

as the interest rate rises, income will rise.



19.

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

A.

sell interest-earning assets in order to obtain non-interest-bearing money.

B.

purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

C.

purchase fewer goods and services.

D.

be content with their portfolios.



20.

The theory of liquidity preference implies that the quantity of real money balances demanded is:

A.

negatively related to both the interest rate and income.

B.

positively related to both the interest rate and income.

C.

positively related to the interest rate and negatively related to income.

D.

negatively related to the interest rate and positively related to income.



21.

The LM curve, in the usual case:

A.

is vertical.

B.

is horizontal.

C.

slopes down to the right.

D.

slopes up to the right.



22.

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

A.

upward and to the right.

B.

downward and to the right.

C.

downward and to the left.

D.

upward and to the left.



23.

The assumption of constant velocity is equivalent to assuming that the demand for real money balances depends on:

A.

income alone.

B.

the interest rate alone.

C.

income and interest rates.

D.

people economizing on real balances as the interest rate rises.



24.

According to the quantity equation, if velocity is not assumed to be constant and the money supply is held constant, then an increase in the interest rate ______ velocity and ______ income.

A.

increases; increases

B.

increases; decreases

C.

decreases; decreases

D.

decreases; increases



25.

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

A.

positively; positively

B.

positively; negatively

C.

negatively; negatively

D.

negatively; positively




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