TUTORIAL TEST 4

INSTRUCTIONS: ANSWER ALL QUESTIONS

Section A
1. Compare the effects of an autonomous increase in government spending in the IS-LM
curve version of the Keynesian model with the effect of the same shift within the
classical model. [4]
2. (a) Why do the Keynesians prefer a policy mix of "tight" fiscal policy and "easy"
monetary policy? Explain this preference. [3]

(b) Since the Keynesians prefer a policy mix of relatively "tight" fiscal policy and
"easy" monetary policy, how would they respond to an income tax cut in order to
expand the economy? [3]

3. Using an IS-LM graph, illustrate how the central bank could target interest rates in
response to expansionary fiscal policy. [5]

4. What is the key difference between the classical and Keynesian aggregate supply functions?
What is the key factor that drives these differences? [4]

Multiple Choice Questions

1. In the Keynesian view,

a. both monetary and fiscal policy can affect income.
b. monetary policy can be ineffective when money demand is less interest rate elastic.
c. fiscal policy is a more reliable way to stimulate output during a recession.
d. all of the above

2. In the IS-LM model, if interest rates rise while output falls the
a. money supply must have fallen.
b. price level must have fallen.
c. money supply must have risen.
d. level of government spending must have fallen.
e. none of the above.

3. The IS curve shifts when all of the following variables change except
a. tax rates.
b. interest rates.
c. government spending.
d. the marginal propensity to consume.
e. both b and d.

4. In the closed economy IS-LM model, an increase in government spending crowds-out

a. prices.
b. the money supply.
c. consumption.
d. investment.
e. both c and d.