Econ 102: Chapter 12

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1. The interaction of the IS curve and the LM the 13. The increase in income in response less than in the
curve together determine: interest to a fiscal expansion in the IS-LM is: Keynesian-cross
rate and model unless the LM
the level curve is horizontal.
of output.
14. Using the IS-LM analysis, if the LM smaller than the
2. (Exhibit: IS-LM Fiscal Policy) Based on the r3, Y2 curve is not horizontal, the multiplier
graph, starting from equilibrium at interest rate multiplier for an increase in
r1 and income Y1, a decrease in government government spending is ______ for an
spending would generate the new equilibrium increase in government purchases
combination of interest rate and income: using the Keynesian-cross analysis.
3. (Exhibit: IS-LM Fiscal Policy) Based on the r2, Y3 15. The reason that the income investment is not
graph, starting from equilibrium at interest rate response to a fiscal expansion is affected by the
r1 and income Y1, an increase in government generally less in the IS-LM model interest rate whereas
spending would generate the new equilibrium than it is in the Keynesian-cross in the IS-LM model
combination of interest rate and income: model is that the Keynesian-cross fiscal expansion
model assumes that: raises the interest rate
4. (Exhibit: IS-LM Fiscal Policy) Based on the r2, Y3
and crowds out
graph, starting from equilibrium at interest rate
investment.
r1 and income Y1, a tax cut would generate the
new equilibrium combination of interest rate 16. In the IS-LM model, changes in taxes consumption
and income: initially affect planned expenditures
through:
5. In the IS-LM model when government spending rises; rises
rises, in short-run equilibrium, in the usual case 17. In the IS-LM analysis, the increase in less than
the interest rate ______ and output ______. income resulting from a tax cut is
usually ______ the increase in income
6. In the IS-LM model, a decrease in government decrease;
resulting from an equal rise in
purchases leads to a(n) ______ in planned decrease;
government spending.
expenditures, a(n) ______ in total income, a(n) decrease;
______ in money demand, and a(n) ______ in the decrease 18. (Exhibit: IS-LM Monetary Policy) r2, Y2
equilibrium interest rate. Based on the graph, starting from
equilibrium at interest rate r1 and
7. In the IS-LM model, the impact of an increase in increase;
income Y1, a decrease in the money
government purchases in the goods market has demand
supply would generate the new
ramifications in the money market, because the
equilibrium combination of interest
increase in income causes a(n) ______ in money
rate and income:
______.
19. (Exhibit: IS-LM Monetary Policy) r3, Y3
8. In the IS-LM model when taxation increases, in falls; falls
Based on the graph, starting from
short-run equilibrium, the interest rate ______
equilibrium at interest rate r1 and
and output ______.
income Y1, an increase in the money
9. If the LM curve is vertical and government zero supply would generate the new
spending rises by G, in the IS-LM analysis, then equilibrium combination of interest
equilibrium income rises by: rate and income:
10. If MPC = 0.75 (and there are no income taxes) 400 20. If the money supply increases, then LM; right
when G increases by 100, then the IS curve for in the IS-LM analysis the ______ curve
any given interest rate shifts to the right by: shifts to the ______.
11. If MPC = 0.75 (and there are no income taxes 300 21. In the IS-LM model when M/P rises, falls; rises
but only lump-sum taxes) when T decreases by in short-run equilibrium, in the usual
100, then the IS curve for any given interest rate case the interest rate ______ and
shifts to the right by: output .______
12. In the IS-LM model under the usual conditions investment 22. In the IS-LM model when M rises but falls; rises
in a closed economy, an increase in P remains constant, in short-run
government spending increases the interest equilibrium, in the usual case the
rate and crowds out: interest rate ______ and output ______.
23. In the IS-LM model when M remains constant rises; falls 33. (Exhibit: Policy Interaction) Based on the graph, decrease;
but P rises, in short-run equilibrium, in the starting from equilibrium at interest rate r3, LM3
usual case the interest rate ______ and output income Y2, IS1, and LM1, if there is an increase
______. in government spending that shifts the IS curve
to IS2, then in order to keep output constant,
24. If the demand for real money balances does is vertical.
the
not depend on the interest rate, then the LM
Federal Reserve should _____ the money supply
curve:
shifting to _____.
25. In the IS-LM model when the Federal sell; rises;
34. (Exhibit: Policy Interaction) Based on the graph, r2, Y3
Reserve decreases the money supply, decrease
starting from equilibrium at interest rate r3,
people ______ bonds and the interest rate
income Y2, IS1, and LM1, if there is an increase
______, leading to a(n) ______ in investment and
in government spending that shifts the IS curve
income.
to IS2 and the Federal Reserve does not
26. The monetary transmission mechanism works investment change
through the effects of changes in the money the money supply, the new equilibrium
supply on: combination of interest and income will be
27. The monetary transmission mechanism in the by lowering _____.
IS-LM model is a process whereby an the interest 35. According to the macroeconometric model more than
increase in the money supply increases the rate so that developed by Data Resources Incorporated, three
demand for goods and services: investment the response of GDP four quarters after an times as
spending increase in government spending, with the great as
increases. nominal interest rate held constant, will be
28. If Congress passed a tax increase at the lower; lower ______ the response of GDP to a similar change
request of the president to reduce the with the money supply held constant.
budget deficit, but the Fed held the money 36. According to the macroeconometric model $25
supply constant, then the two policies developed by Data Resources Incorporated, if billion.
together would generally lead to ______ taxes are increased by $100 billion, but the
income and a ______ interest rate. money supply is held constant, then GDP will
29. According to the IS-LM model, if Congress decrease fall by about:
raises taxes but Fed must ______ the money 37. An increase in investment demand for any increase;
supply. given level of income and interest rates—due, raise
the Fed wants to hold the interest rate for example, to more optimistic "animal
constant, then the spirits"—will, within the IS-LM framework, ______
30. According to the IS-LM model, if Congress increase output and ______ interest rates.
raises taxes but the Fed wants to hold 38. An increase in consumer saving for any given IS curve
income constant, then the Fed must______ the level of income will shift the: downward
money supply. and to the
31. If taxes are raised, but the Fed prevents investment left.
income from falling by raising the money rises but 39. An increase in the demand for money, at any lower;
supply, then: consumption given income level and level of interest rates, raise
falls. will, within the IS-LM framework, ______ output
32. (Exhibit: Policy Interaction) Based on the increase; and ______ interest rates.
graph, starting from equilibrium at interest LM2 40. In the IS-LM model, a decrease in the interest increase in
rate r3, income Y2, IS1, and LM1, if there is an rate would be the result of a(n): the money
increase in government spending that shifts supply.
the IS curve to IS2, then in order to keep the
41. In the IS-LM model, a decrease in output would increase in
interest rate
be the result of a(n): money
constant, the Federal Reserve should _____
demand.
the money supply shifting to _____.
42. The U.S. recession of 2001 can be explained in IS; left
part by a declining stock market and terrorist
attacks. Both of these shocks can be
represented in the IS-LM model by shifting the
______ curve to the ______.
43. One policy response to the U.S. economic IS; right 55. (Exhibit: IS-LM to Aggregate Demand) the aggregate
slowdown of 2001 was tax cuts. This policy Based on the graph, if LM3 shifts to LM2 demand curve
response can be represented in the IS-LM because the money supply decreases will shift to the
model by shifting the ______ curve to the ______. from M3 to M2 then, holding other left.
factors constant:
44. One policy response to the U.S. economic LM; right
slowdown of 2001 was to increase money 56. (Exhibit: IS-LM to Aggregate Demand) P1 >P2 andM1
growth. This policy response can be Based on the graph, which is the correct <M2
represented in the IS-LM model by shifting the ordering of the price levels and money
______ curve to the ______. supplies?
45. When bond traders for the Federal Reserve sell; LM 57. A movement along an aggregate resulting from a
seek to increase interest rates, they ______ demand curve corresponds to a change change in the
bonds, which shifts the ______ curve to the left. in income in the IS-LM model ______, while price level; at a
a shift in an aggregate demand curve given price level
46. When bond traders for the Federal Reserve buy; LM
corresponds to a change in income in the
seek to decrease interest rates, they ______
IS-LM model ______.
bonds, which shifts the ______ curve to the right.
58. Starting from a short-run equilibrium output will
47. The aggregate demand curve generally slopes lower;
greater than the natural rate of output, as decrease, but
downward and to the right because, for any raises;
the economy returns to a long-run the price level
given money supply M a higher price level P reduces
equilibrium: will increase.
causes a ______ real money supply M/P, which
______ the interest rate and ______ spending. 59. If the short-run IS-LM equilibrium occurs decrease; LM
at a level of income below the natural
48. An economic change that does not shift the the price
level of output, then in the long run the
aggregate demand curve is a change in: level.
price level will ______, shifting the ______
49. A change in income in the IS-LM model for a represents curve to the right and returning output to
fixed price a shift in the natural level.
the
60. If the short-run IS-LM equilibrium occurs price level;
aggregate
at a level of income above the natural increase
demand
level of output, in the long run the ______
curve.
will ______ in order to return output to the
50. An increase in the money supply shifts the LM: shifts natural level.
______ curve to the right, and the aggregate to the
61. (Exhibit: Short Run to Long Run) Based on B; lower
demand curve ______. right
the graph, if the economy starts from a
51. A tax cut shifts the ______ to the right, and the IS; shifts short-term equilibrium at A, then the
aggregate demand curve ______. to the long-run equilibrium will be at ____ with a
right _____ price level.
52. A decrease in the price level shifts the ______ LM; does 62. (Exhibit: Short Run to Long Run) Based on C; higher
curve to the right, and the aggregate demand not shift the graph, if the economy starts from a
curve ______. short-term equilibrium at D, then the
53. A change in income in the IS-LM model movement long-run equilibrium will be at ____ with a
resulting from a change in the price level is along the; _____ price level.
represented by a ______ aggregate demand shift in the 63. The macroeconomic model may be prices are fixed;
curve, while a change in income in the IS-LM completed by adding either the output is fixed
model for a given price level is represented by Keynesian assumption that ______ or the
a ______ aggregate demand curve. classical assumption that ______.
54. (Exhibit: IS-LM to Aggregate Demand) Based this 64. Analysis of the short and long runs Keynesian; the
on the graph, if LM1 shifts to LM2 because the represents indicates that the ______ assumptions are short run,
price level decreases from P1 to P2 then, a most appropriate in ______. whereas the
holding other factors constant: movement classical
down the assumptions are
aggregate most
demand appropriate in
curve. the long run.
65. The spending hypothesis
suggests that the Great
Depression was caused by a:
66. All of the following events are
consistent with the spending
hypothesis as contributing to the
Great Depression except:
67. The money hypothesis suggests
that the Great Depression was
caused by a:
68. The Great Depression in the
United States:
69. The Pigou effect:
70. The Pigou effect suggests that
falling prices will increase
income because real balances
influence ______ and will shift the
______ curve.
71. If real money balances enter the
IS-LM model both through the
theory of liquidity preference
and the Pigou effect, then a fall
in the price level will shift:
72. If real money balances enter the
IS-LM model both through the
theory of liquidity preference
and the Pigou effect, then a fall
in the price level will result in
higher income and:
73. The debt-deflation theory of the
Great Depression suggests that
an ______ deflation redistributes
wealth in such a way as to ______
spending on goods and services.
74. The debt-deflation hypothesis
explains the fall in income as a
consequence of unexpected
deflation transferring wealth
______, and that creditors have
______ propensity to consume
than debtors.
leftward shift in the IS 75.
curve.
the 25-percent 76.
reduction in the money
supply between 1929
and 1933.
77.
leftward shift in the LM
curve.
78.
probably cannot be
considered to have
started because of a
leftward shift in the LM
79.
curve because real
balances did not fall
between 1929 and 1931.
suggests that as prices
fall and real money
balances rise,
consumers should feel
80.
wealthier and spend
more.
consumer spending; IS
81.
both the LM and the IS
curves.
82.
either higher, lower, or
unchanging interest
rates.
83.
unexpected; reduce
84.
from debtors to
creditors; a smaller
85.
An unexpected deflation can debtors to creditors,
change demand by redistributing thus lowering
wealth from: consumption.
Possible explanations put forth for the Pigou effect.
the Great Depression do not
include:
Investment depends on the ______ real; nominal
interest rate, and money demand
depends on the ______ interest rate.
In the IS-LM model, starting with no IS curve shifts
expected inflation, if expected leftward.
inflation becomes negative, then
the:
One explanation for the impact of lowers; raises
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.
In the IS-LM model, a decrease in decrease in both
expected inflation (or an increase output and the
in expected deflation), leads to nominal interest rate.
a(n):
Other things equal, an expected raising the real interest
deflation can change demand by: rate for any given
nominal interest rate,
thus reducing desired
investment.
During the financial crisis of 2008- contractionary shift in
2009, many financial institutions the IS curve
stopped making loans even to
creditworthy customers, which
could be represented in the IS-LM
model as a(n):
All of the following may have high inflation.
contributed to the financial crisis
and economic downturn of 2008-
2009 except:
Most economists believe: 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.
A liquidity trap occurs when: interest rates fall so
low that monetary
policy is no longer
effective.
86. If a liquidity trap does exist, then ______ monetary; low 99. If neither investment nor consumption vertical;
policy will not be effective in depends on the interest rate, then the IS monetary
increasing income when interest rates curve is ______ and ______ policy has no
reach very ______ levels. effect on output.
87. If expected inflation equals 3 percent -2 100. If money demand is infinite below some horizontal;
and monetary policymakers push the certain r (e.g., r) and zero above r, then the monetary
nominal interest rate to 1 percent, the LM curve is ______ and ______ policy has no
real interest rate equals ______ percent. effect on output.
88. When drawn with the interest rate on smaller the 101. If investment demand is infinite below horizontal;
the vertical axis and income on the sensitivity of some certain r (e.g., r*) and zero above r*, fiscal
horizontal axis, the IS curve will be investment then the IS curve is ______ and ______ policy
steeper the: spending to the has no effect on output.
interest rate.
102. If the investment demand function is I = c - small; large
89. The slope of the IS curve depends on: the interest dr and the quantity of real money
sensitivity of demanded is eY - fr, then fiscal policy is
investment and relatively potent in influencing aggregate
the marginal demand when d is ______ and f is ______.
propensity to
103. If the investment demand function is I = c - large; small.
consume.
dr and the quantity of real money
90. A given increase in taxes shifts the IS larger the demanded is eY - fr, then monetary policy
curve more to the left the: marginal is relatively potent in influencing
propensity to aggregate demand when d is ______ and f
consume. is ______.
91. The LM curve is steeper the ______ the smaller; greater 104. Those economists who believe that fiscal responsiveness
interest sensitivity of money demand policy is more potent than monetary of investment
and the ______ the effect of income on policy argue that the: to the interest
money demand. rate is small.
92. If the demand function for money is .0.005 105. Those economists who believe that responsiveness
M/P = 0.5Y - 100r, then the slope of the monetary policy is more potent than fiscal of money
LM curve is: policy argue that the: demand to the
interest rate is
93. If the demand function for money is right by 200.
small.
M/P = 0.5Y - 100r and if M/P increases
by 100, then the LM curve for any given 106. According to the IS-LM model, when the income and
interest rate shifts to the: government increases taxes and the interest
government purchases by equal amounts: rate rise,
94. Other things equal, a given change in flatter the LM
whereas
government spending has a larger curve.
consumption
effect on demand the:
and investment
95. Other things equal, a given change in steeper the IS fall.
government spending has a larger curve.
107. If consumption is given by C = 200 + Y = 1,600 - 3T -
effect on demand the:
0.75(Y - T) and investment is given by I = 100r + 4G.
96. Other things equal, a given change in flatter the IS 200 - 25r, then the formula for the IS curve
money supply has a larger effect on curve. is:
demand the:
108. If the IS curve is given by Y = 1,700 - 100r Y = 1,100, r = 6
97. Other things equal, a given change in smaller the and the LM curve is given by Y = 500 + percent.
money supply has a larger effect on income sensitivity 100r, then equilibrium income and interest
demand the: of money rate are given by:
demand.
109. If the IS curve is given by Y = 1,700 - 100r, 50 and the
98. If money demand does not depend on vertical; fiscal the money demand function is given by interest rate
the interest rate, then the LM curve is (M/P)d = Y - 100r, the money falls by 0.5
______ and ______ policy has no effect on percent.
output.
110. If investment does not depend on the interest rate, then the IS; vertical
______ curve is ______.
111. If money demand does not depend on income, then the ______ LM; horizontal
curve is ______.
112. If money demand is extremely sensitive to the interest rate, LM; horizontal
then the ______ curve is ______.
113. If the government wants to raise investment but keep output adopt a loose monetary policy and a tight fiscal policy.
constant, it should:
114. A tax cut combined with tight money, as was the case in the rise in the real interest rate and a fall in investment.
United States in the early 1980s, should lead to a:
115. An increase in the money supply: lowers the interest rate and increases income in the short run, but
leaves both unchanged in the long run.
116. An increase in government spending raises income: in the short run, but leaves it unchanged in the long run, while
lowering investment.
117. An increase in taxes lowers income: in the short run, but leaves it unchanged in the long run, while
lowering consumption and increasing investment.