1.

The interaction of the IS curve and the LM curve together determine:

A.

the price level and the inflation rate.

B.

the interest rate and the price level.

C.

investment and the money supply.

D.

the interest rate and the level of output.



2.

In the IS-LM model when government spending 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



3.

In the IS-LM model when taxation increases, 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



4.

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

A.

prices.

B.

investment.

C.

the money supply.

D.

taxes.



5.

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

A.

larger than the multiplier

B.

the same as the multiplier

C.

smaller than the multiplier

D.

sometimes larger and sometimes smaller than the multiplier



6.

In the IS-LM analysis, the increase in income resulting from a tax cut is usually _____ the increase in income resulting from an equal rise in government spending.

A.

less than

B.

greater than

C.

equal to

D.

sometimes less and sometimes greater than



7.

In the IS-LM model when M/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



8.

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.



9.

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



10.

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.



11.

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.

decrease in money demand.

D.

increase in government purchases.



12.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response 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



13.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

A.

buy; IS

B.

buy; LM

C.

sell; IS

D.

sell; LM



14.

An economic change that does not shift the aggregate demand curve is a change in:

A.

the money supply.

B.

the investment function.

C.

the price level.

D.

taxes.



15.

A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.

A.

increase both output and the price level

B.

decrease output but increase prices

C.

increase output but decrease the price level

D.

decrease both output and the price level



16.

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

A.

output is fixed; prices are fixed

B.

prices are fixed; output is fixed

C.

the interest rate is fixed; the money supply is fixed

D.

prices are flexible; output varies



17.

The spending hypothesis suggests that the Great Depression was caused by a:

A.

leftward shift in the IS curve.

B.

rightward shift in the IS curve.

C.

leftward shift in the LM curve.

D.

rightward shift in the LM curve.



18.

The Great Depression in the United States:

A.

was likely caused by a fall in the money supply because it fell by 25 percent from 1929 to 1933.

B.

cannot be attributed to a fall in the money supply because the money supply did not fall.

C.

probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931.

D.

probably was caused by a leftward shift in the LM curve because interest rates remained high between 1929 and 1933.



19.

The debt-deflation theory of the Great Depression suggests that a(n) ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.

A.

unexpected; reduce

B.

unexpected; increase

C.

expected; reduce

D.

expected; increase



20.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

A.

lowers; raises

B.

raises; lowers

C.

raises; raises

D.

lowers; lowers



21.

Most economists believe:

A.

the Great Depression is very likely to be repeated.

B.

it is likely that the money supply might again fall by one-fourth, but that fiscal policy would be expansionary enough in this case to avoid a Great Depression.

C.

it is unlikely that the money supply might fall again by one-fourth, but it is likely that fiscal policy might be so contractionary as to cause a Great Depression.

D.

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.



22.

If expected inflation equals 3 percent and monetary policy makers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

A.

4

B.

1

C.

0

D.

-2



23.

The slope of the IS curve depends on:

A.

the interest sensitivity of investment and the amount of government spending.

B.

the interest sensitivity of investment and the marginal propensity to consume.

C.

the interest sensitivity of investment and the tax rates.

D.

tax rates and government spending.



24.

Other things equal, a given change in government spending has a larger effect on demand the:

A.

flatter the LM curve.

B.

steeper the LM curve.

C.

smaller the interest sensitivity of money demand.

D.

larger the income sensitivity of money demand.



25.

If investment does not depend on the interest rate, then the ______ curve is ______.

A.

IS; vertical

B.

IS; horizontal

C.

LM; vertical

D.

LM; horizontal




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