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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, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______. A) increase; supply B) increase; demand C) decrease; supply D) decrease; demand 4. If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400. 5. 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.
Using the IS-LM analysis. (Exhibit: IS-LM Monetary Policy) Based on the graph. B) investment. a decrease in the money supply would generate the new equilibrium combination of interest rate and income: A) r2. Y2 C) r2. Use the following to answer question 8: (Exhibit: IS-LM Monetary Policy) 8.6. Y3 D) r3. the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis. In the IS-LM model. changes in taxes initially affect planned expenditures through: A) consumption. starting from equilibrium at interest rate r1 and income Y1. Y3 Page 2 . if the LM curve is not horizontal. D) the interest rate. Y2 B) r3. 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 7. C) government spending.
An increase in consumer saving for any given level of income will shift the: A) LM curve upward and to the left. 12. rises D) falls. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase 14. the interest rate ______ and output ______. D) IS curve upward and to the right. falls B) rises. higher C) no change in. right 10. lower B) lower. but the Fed held the money supply constant. left D) IS. If the demand for real money balances does not depend on the interest rate. C) is horizontal. then the two policies together would generally lead to ______ income and a ______ interest rate. In the IS-LM model when M rises but P remains constant. rises C) falls. D) is vertical. C) IS curve downward and to the left. A) lower. B) LM curve downward and to the right. Page 3 . If Congress passed a tax increase at the request of the president to reduce the budget deficit. According to the IS-LM model. in short-run equilibrium. if Congress raises taxes but the Fed wants to hold income constant. B) slopes down to the right. If the money supply increases. in the usual case. A) LM. A) rises. right C) IS. left B) LM. then in the IS-LM analysis the ______ curve shifts to the ______. then the LM curve: A) slopes up to the right. then the Fed must ______ the money supply. falls 11. higher 13. lower D) no change in.9.
does not shift C) LM: shifts to the right D) LM. does not shift 18. shifts to the right B) IS. lowers. reduces B) higher. will ______ in the long run. In the IS-LM model. A) movement along the. D) increase in money demand. 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 Page 4 . A) IS. A shift in the aggregate demand curve. increases C) lower. movement along the C) vertical. A tax cut shifts the ______ to the right. reduces 17. a decrease in the interest rate would be the result of a(n): A) increase in the money supply. 16. for any given money supply M a higher price level P causes a ______ real money supply M/P. B) increase in government purchases. shift in the B) shift in the. C) decrease in taxes. and the aggregate demand curve ______. lowers. horizontal D) horizontal.15. starting from long-run equilibrium. increases D) higher. while a change in income in the IS-LM model for a given price level represents a ______ aggregate demand curve. raises. The aggregate demand curve generally slopes downward and to the right because. as compared to a short-run equilibrium. which ______ the interest rate and ______ spending: A) lower. A change in income in the IS-LM model resulting from a change in the price level represents a ______ aggregate demand curve. vertical 19. raises. which increases output in the short run.
B) Y = 1. C) adopt a loose monetary policy and a tight fiscal policy. C) Y = 1. If the demand function for money is M/P = 0. 22. Page 5 . r = 6 percent. then equilibrium income and interest rate are given by: A) Y = 1. then the ______ curve is ______. 23. horizontal C) LM. B) adopt a loose monetary policy and a loose fiscal policy.700 – 100r and the LM curve is given by Y = 500 + 100r. then the LM curve for any given interest rate shifts to the: A) left by 100. If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output. If the government wants to raise investment but keep output constant.200. horizontal C) LM. decrease C) money supply. r = 5 percent. increase B) interest rate. vertical B) IS. If the IS curve is given by Y = 1. r = 5 percent. A) IS. increase D) consumption function. vertical B) IS. it should: A) adopt a loose monetary policy but keep fiscal policy unchanged. vertical D) LM. then the ______ curve is ______.5Y – 100r and if M/P increases by 100. A) IS. If investment does not depend on the interest rate. C) right by 100.100.000. horizontal 24.20. D) keep monetary policy unchanged but adopt a tight fiscal policy.100. decrease 21. B) left by 200. in the long run the ______ will ______ in order to return output to the natural level. A) price level. If money demand does not depend on income. vertical D) LM. D) right by 200. horizontal 25. r = 5 percent. D) Y = 1.
B) in the short run. and national saving? (Hint: Check C + I + G = Y.200. An increase in government spending raises income: A) and the interest rate in the short run.000? What must be the value of M? What will I be? What will be the levels of private. C) in the short run. Be sure to label: i. Use the IS-LM model to illustrate graphically the impact on output and interest rates of a one-time increase in the price level due to a large increase in oil prices.200. 27.600 + 3G – 2T – 150r and the LM curve Y = 2 M/P + 100r [or r = 0. public saving. and national saving? (Hint: Check C + I + G = Y. Which set of policies may be referred to as tight fiscal. iv. but leaves both unchanged in the long run. but leaves it unchanged in the long run. Page 6 .000.000. the direction the curves shift. D) and the interest rate in both the short and long runs. public. The price level is 1. Assume that government spending is fixed at 1.) c. The consumption function is C = 200 + (2/3)(Y – T). What level of r is needed for I = 900? What levels of T and M must be set to achieve the two goals? What will be the levels of private saving. a. the axes. With G set at 1.000. Longrun equilibrium output for this economy is 4. Now assume that the government wants to cut taxes to 1. while lowering investment. loose money? Which set of policies may be referred to as loose fiscal. what will the interest rate be at Y = 4. ii.02(M/P)]. the initial equilibrium values. iii. but leaves it unchanged in the long run.01Y – 0.200.000 – 50r.26. the curves. The government wants to achieve a level of investment equal to 900 and also achieve Y = 4. tight money? Which “policy mix” most encourages investment? 28. while lowering consumption. The investment function for this economy is 1.0 and M = 1.) b. the terminal equilibrium values. and v. Assume that an economy is described by the IS curve Y = 3.
an increase in government spending would generate the new equilibrium combination of interest rate and income: A) r2. starting from equilibrium at interest rate r1 and income Y1.Use the following to answer question 29: (Exhibit: IS-LM Fiscal Policy) 29. Y3 D) r3. Y2 B) r3. Y2 C) r2. Y3 Page 7 . (Exhibit: IS-LM Fiscal Policy) Based on the graph.
21. tight money. M = 1. 24. M = 1. The policy under part b is loose fiscal. 20. 23. public saving = –200. T = 1. The policy under part a most encourages investment. D B B D B C A A B C D A A C A A A A B A D A A D C B a. national saving = 900. 10. 2. r = 8. 7. 25. 15. 19.600. 26. r = 2. The policy under part a is tight fiscal.Answer Key 1. 4. 16. 13. national saving = 600. 18. public saving = 250.450. 8. private saving = 800. 11. 27. 17. Private saving = 650. 5. b. 9. c. I = 600. 6. 22. easy money. 3. 14. Page 8 .900. 12.
29.28. C Page 9 .
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