Macroeconomics 7th Edition Mankiw

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Name Chapter 10
Description
Instructions

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Multiple Choice 1 points

Question
In The General Theory of Employment, Interest, and Money, John Maynard
Keynes proposed that the Great Depression was caused by
Answer government budget deficits.
low aggregate demand.
saving rates that were too low.
inept monetary policy.
Correct Feedback Correct. The answer is B. See the introduction to Chapter
10.
Incorrect Feedback Incorrect. The correct answer is B. See the introduction to
Chapter 10.
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Multiple Choice 1 points

Question Which of the following is NOT exogenous in the IS–LM model?

Answer the interest rate
taxes
the price level
government expenditure
Correct
Correct. The answer is A. See the introduction to Chapter 10.
Feedback
Incorrect Incorrect. The correct answer is A. See the introduction to
Feedback Chapter 10.
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Multiple Choice 1 points

Question In the Keynesian cross model of Chapter 10, if the interest rate is
constant and the MPC is 0.7, then the government purchases multiplier is
Answer 0.3.
0.7.

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1.4.
3.3.
Correct Correct. The answer is D. The multiplier is equal to 1/(1 – MPC).
Feedback If the MPC is 0.7, the government purchases multiplier will be
3.3. See Section 10-1. See Section 10-1.
Incorrect Incorrect. The correct answer is D. The multiplier is equal to 1/(1
Feedback – MPC). If the MPC is 0.7, the government purchases multiplier
will be 3.3. See Section 10-1.
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Multiple Choice 1 points

Question In the Keynesian cross model of Chapter 10, if the interest rate is
constant, the MPC is 0.6, and taxes are increased by $100, by how much
does income change?
Answer It increases by $150.
It decreases by $150.
It increases by $166.
It decreases by $166.
Correct Correct. The answer is B. The tax multiplier is equal to -MPC/(1 –
Feedback MPC). If the MPC is equal to 0.6, the multiplier is -1.5, which
implies that a tax increase of $100 induces a decrease in income
of $150. See Section 10-1.
Incorrect Incorrect. The correct answer is B. The tax multiplier is equal to
Feedback -MPC/(1 – MPC). If the MPC is equal to 0.6, the multiplier is -1.5,
which implies that a tax increase of $100 induces a decrease in
income of $150. See Section 10-1.
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Multiple Choice 1 points

Question The relationship between interest rates and the level of income that
arises in the market for goods and services is called the
Answer LM curve.
IS curve.
aggregate demand curve.
aggregate supply curve.
Correct Feedback Correct. The answer is B. See Section 10-1.
Incorrect Feedback Incorrect. The correct answer is B. See Section 10-1.
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Multiple Choice 1 points

Question The investment function and the IS curve slope

Answer upward because higher interest rates induce more
investment.
upward because higher interest rates induce less
investment.

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downward because higher interest rates induce more

investment.
downward because higher interest rates induce less
investment.
Correct Feedback Correct. The answer is D. See Section 10-1.
Incorrect
Incorrect. The correct answer is D. See Section 10-1.
Feedback
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Multiple Choice 1 points

Question The slope of the IS curve depends on

Answer the sensitivity of investment to the interest rate.
the level of government expenditures.
the sensitivity of the demand for real money balances to the
interest rate.
none of the above.
Correct Correct. The answer is A. The slope of the IS curve depends on
Feedback the sensitivity of investment to the interest rate. See Section
10-1.
Incorrect Incorrect. The correct answer is A. The slope of the IS curve
Feedback depends on the sensitivity of investment to the interest rate.
See Section 10-1.
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Multiple Choice 1 points

Question The IS curve is drawn for a given

Answer fiscal policy
monetary policy.
interest rate.
level of income.
Correct Feedback Correct. The answer is A. See Section 10-1.
Incorrect Feedback Incorrect. The correct answer is A. See Section 10-1.

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Multiple Choice 1 points

Question Exogenous increases in the supply of loanable funds shift the

Answer LM curve outward.
LM curve inward.
IS curve outward.
IS curve inward.
Correct Correct. The answer is D. If the supply of loanable funds
Feedback increases, then at each Y, the r that equilibrates the demand for
and supply of loanable funds will be lower. This translates into an
inward shift of the IS curve. See Section 10-1.

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Incorrect Incorrect. The correct answer is D. If the supply of loanable funds

Feedback increases, then at each Y, the r that equilibrates the demand for
and supply of loanable funds will be lower. This translates into an
inward shift of the IS curve. See Section 10-1.
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Multiple Choice 1 points

Question If investment becomes less sensitive to the interest rate, then the
Answer LM curve becomes steeper.
LM curve becomes flatter.
IS curve becomes steeper.
IS curve becomes flatter.
Correct Correct. The answer is C. If investment becomes less sensitive to
Feedback the interest rate, a given increase in Y must be accompanied by a
larger increase in r to keep the loanable funds market in
equilibrium. This implies a steeper IS curve. See Section 10-1.
Incorrect Incorrect. The correct answer is C. If investment becomes less
Feedback sensitive to the interest rate, a given increase in Y must be
accompanied by a larger increase in r to keep the loanable funds
market in equilibrium. This implies a steeper IS curve. See
Section 10-1.
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Multiple Choice 1 points

Question If the marginal propensity to consume is large, then the

Answer LM curve is relatively steep.
LM curve is relatively flat.
IS curve is relatively steep.
IS curve is relatively flat.
Correct Correct. The answer is D. A larger marginal propensity to consume
Feedback means that a given increase in Y will result in a smaller increase in
saving. Thus, it must be accompanied by a smaller decrease in r to
keep the loanable funds market in equilibrium. This implies a flat
IS curve. See Section 10-1.
Incorrect Incorrect. The correct answer is D. A larger marginal propensity to
Feedback consume means that a given increase in Y will result in a smaller
increase in saving. Thus, it must be accompanied by a smaller
decrease in r to keep the loanable funds market in equilibrium.
This implies a flat IS curve. See Section 10-1.
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Multiple Choice 1 points

Question The LM curve is drawn for a given

Answer real income.
nominal income.
money supply.

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interest rate.
Correct Feedback Correct. The answer is C. See Section 10-2.
Incorrect Feedback Incorrect. The correct answer is C. See Section 10-2.

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Multiple Choice 1 points

Question The quantity of real money balances demanded depends on the

Answer nominal interest rate.
rate of inflation.
nominal money supply.
price level.
Correct Feedback Correct. The answer is A. See Section 10-2.
Incorrect Feedback Incorrect. The correct answer is A. See Section 10-2.

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Multiple Choice 1 points

Question The quantity of real money balances demanded depends on

Answer consumption.
real income.
nominal income.
the price level.
Correct Feedback Correct. The answer is B. See Section 10-2.
Incorrect Feedback Incorrect. The correct answer is B. See Section 10-2.

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Multiple Choice 1 points

Question The relationship between the interest rate and the level of income
that arises in the market for money balances is called the
Answer LM curve.
IS curve.
aggregate demand curve.
aggregate supply curve.
Correct Feedback Correct. The answer is A. See Section 10-2.
Incorrect Feedback Incorrect. The correct answer is A. See Section 10-2.
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Multiple Choice 1 points

Question The theory of liquidity preference assumes that the supply of real
money balances, plotted against the interest rate, is
Answer upward sloping.
downward sloping.
horizontal.

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vertical.
Correct Correct. The answer is D. The supply of real balances does not
Feedback depend on the interest rate. Therefore, it is vertical. See
Section 10-2.
Incorrect Incorrect. The correct answer is D. The supply of real balances
Feedback does not depend on the interest rate. Therefore, it is vertical.
See Section 10-2.
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Multiple Choice 1 points

Question The theory of liquidity preference postulates that the demand for real
money balances, plotted against the interest rate, is
Answer upward sloping.
downward sloping.
horizontal.
vertical.
Correct Correct. The answer is B. Because the interest rate is the cost of
Feedback holding money, a higher interest rate lowers the quantity of real
balances demande This means that the demand curve is
downward sloping. See Section 10-2.
Incorrect Incorrect. The correct answer is B. Because the interest rate is the
Feedback cost of holding money, a higher interest rate lowers the quantity
of real balances demande This means that the demand curve is
downward sloping. See Section 10-2.
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Multiple Choice 1 points

Question

In the early 1980s the Federal Reserve, under Paul Volcker, began a period of
tight money aimed at reducing inflation. Under this policy, nominal interest
rates were:
Answer higher in the short run and higher in the long run.
higher in the short run and lower in the long run.
lower in the short run and higher in the long run.
lower in the short run and lower in the long run.
Correct Correct. The answer is B. Recall that the nominal interest rate is
Feedback the sum of the real interest rate and the rate of inflation. The
theory of liquidity preference tells us that tight money causes the
real interest rate to rise in the short run. Since prices are sticky in
the short run, this results in a rise in the nominal interest rate in
the short run. In the long run, however, the inflation rate will fall,
causing the nominal interest rate to be lower. See Case Study in
Section 10-2.
Incorrect Incorrect. The correct answer is B. Recall that the nominal interest
Feedback rate is the sum of the real interest rate and the rate of inflation.
The theory of liquidity preference tells us that tight money causes
the real interest rate to rise in the short run. Since prices are

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sticky in the short run, this results in a rise in the nominal interest
rate in the short run. In the long run, however, the inflation rate
will fall, causing the nominal interest rate to be lower. See Case
Study in Section 10-2.
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Multiple Choice 1 points

Question In the quantity theory interpretation of the LM curve, the LM curve

slopes up because
Answer a higher inflation rate implies a higher interest rate.
velocity depends on the interest rate.
when income rises, a lower interest rate is necessary to
equilibrate the money market.
for a given price level, the supply of money determines the
level of income.
Correct
Correct. The answer is B. See Section 10-2.
Feedback
Incorrect
Incorrect. The correct answer is B. See Section 10-2.
Feedback
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Multiple Choice 1 points

Question If the central bank increased the supply of real money balances, then
the LM curve would
Answer become steeper.
become flatter.
shift inward.
shift outward.
Correct Correct. The answer is D. If the supply of real balances increases,
Feedback then the interest rate at every level of output must be lower to
equilibrate the market for real balances. This means the LM curve
shifts outwar See Section 10-2.
Incorrect Incorrect. The correct answer is D. If the supply of real balances
Feedback increases, then the interest rate at every level of output must be
lower to equilibrate the market for real balances. This means the
LM curve shifts outwar See Section 10-2.
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Multiple Choice 1 points

Question If money demand became more sensitive to the level of income, the
LM curve would
Answer become steeper.
become flatter.
shift inward.
shift outward.

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Correct Correct. The answer is A. If money demand became more sensitive

Feedback to the level of income, a given increase in income would
necessitate a larger increase in the real interest rate to keep the
money market in equilibrium. This means that the LM curve would
get steeper. See Section 10-2.
Incorrect Incorrect. The correct answer is A. If money demand became more
Feedback sensitive to the level of income, a given increase in income would
necessitate a larger increase in the real interest rate to keep the
money market in equilibrium. This means that the LM curve would
get steeper. See Section 10-2.
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Multiple Choice 1 points

Question The “money hypothesis” explaining the Great Depression stipulates

that the Depression was caused by a contractionary shift in the LM curve.
Which of the following facts supports this hypothesis?
Answer The stock market crash of 1929 reduced real wealth
The interest rate did not rise
The nominal money supply contracted and the price level
fell dramatically
Real balances did not fall
Correct Feedback Correct. The answer is C. See Section 11-3.
Incorrect Feedback Incorrect. The correct answer is C. See Section 11-3.

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Multiple Choice 1 points

Question
The ¿spending hypothesis¿ explaining the Great Depression stipulates that the
main cause of the Great Depression was a decline in spending. Which of the
following does not support this hypothesis?
Answer Investment in housing declined.
Widespread bank failures occurred.
Government purchases rose during 1929¿1932.
The stock market crash of 1929 reduced real wealth.
Correct Correct. The answer is C. If government purchases rose during
Feedback the Great Depression, this would have increased spending. See
Section 11-3.
Incorrect Incorrect. The correct answer is C. If government purchases
Feedback rose during the Great Depression, this would have increased
spending. See Section 11-3.
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Multiple Choice 1 points

Question The Pigou effect stipulates

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Answer falling prices expand income.

falling prices depress income.
expanding income leads to a higher price level.
falling income leads to a lower price level.
Correct Feedback Correct. The answer is A. See Section 11-3.
Incorrect Feedback Incorrect. The correct answer is A. See Section 11-3.

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Multiple Choice 1 points

Question Debt-deflation leads to lower income because

Answer falling prices redistribute income from creditors to debtors,
which leads to a decline in the APC.
falling prices redistribute income from debtors to creditors,
which leads to a decline in the APC.
a rise in the saving rate leads to a lower amount of real debt
in the economy, depressing consumption and therefore
income.
a fall in the saving rate leads to higher interest rates and
lower income.
Correct
Correct. The answer is B. See Section 11-3.
Feedback
Incorrect
Incorrect. The correct answer is B. See Section 11-3.
Feedback
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Multiple Choice 1 points

Question Most economists believe that the Great Depression is unlikely to be

repeated in the future. Which of the following is NOT a legitimate reason to
believe this?
Answer The Fed will not let the money supply fall by a large amount.
More effort is made today to balance the government budget.
Widespread bank failures are less likely to occur.
The income tax provides an automatic stabilizer today.
Correct Correct. The answer is B. The attempt to balance the budget at the
Feedback beginning of the Great Depression made matters worse by
contracting aggregate demand. Since the Great Depression, less of
an effort has been made to balance the federal government
budget. See Section 11-3.
Incorrect Incorrect. The correct answer is B. The attempt to balance the
Feedback budget at the beginning of the Great Depression made matters
worse by contracting aggregate demand. Since the Great
Depression, less of an effort has been made to balance the federal
government budget. See Section 11-3.
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Multiple Choice 1 points

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Question Some economists believe that a liquidity trap may occur when
Answer the real interest rate is negative.
the unemployment rate exceeds 10 percent.
the nominal interest rate is close to zero.
output growth exceeds its long-run potential rate.
Correct Correct. The answer is A liquidity trap is a situation where the
Feedback nominal interest rate cannot be lowered below zero, so monetary
policy may be unable to expand aggregate demand in the
economy. See Section 11-3.
Incorrect Incorrect. The correct answer is A liquidity trap is a situation
Feedback where the nominal interest rate cannot be lowered below zero, so
monetary policy may be unable to expand aggregate demand in
the economy. See Section 11-3.
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