Q&A Hero

Q: In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; rise; left C) remains below; fall; left D) remains below; rise; right

Q: The rate of output at which the price level has no tendency to rise or fall is called the A) natural rate of output. B) potential level of income. C) bliss point. D) efficient level of output.

Q: Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

Q: Using the ISLM model, explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate. What is this effect called?

Q: If the Fed adopts a policy of pegging the interest rate, a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________. A) fall; increasing B) fall; decreasing C) rise; decreasing D) rise; increasing

Q: If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM

Q: If the ________ curve is relatively more unstable than the ________ curve, a money supply target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM

Q: If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; larger B) a money supply; smaller C) a money supply; larger D) an exchange rate; smaller

Q: If the economy is characterized by a certain and stable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; smaller B) a money supply; smaller C) a money supply; larger D) an exchange rate; larger

Q: The more interest-sensitive is money demand, the A) more effective is fiscal policy relative to monetary policy. B) more effective is monetary policy relative to fiscal policy. C) steeper is the IS curve. D) steeper is the LM curve.

Q: The less interest-sensitive is money demand, the A) more effective is fiscal policy relative to monetary policy. B) more effective is monetary policy relative to fiscal policy. C) steeper is the IS curve. D) flatter is the LM curve.

Q: Crowding out will be more pronounced the closer to vertical is the A) IS curve. B) LM curve. C) consumption function. D) aggregate demand function.

Q: The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as A) fiscal neutrality. B) a recession. C) complete crowding out. D) inflation.

Q: The LM curve will be vertical and fiscal policy ineffective when A) the demand for money is unaffected by changes in the interest rate. B) the demand for money is unaffected by changes in income. C) investment is unaffected by changes in the interest rate. D) investment is unaffected by changes in income.

Q: If the quantity of money demanded is not affected by changes in the interest rate, the LM curve is ________ and fiscal policy will be ________. A) horizontal; very effective B) horizontal; ineffective C) vertical; ineffective D) vertical; very effective

Q: Using the ISLM model, show graphically and explain the effects of a monetary contraction. What is the effect on the equilibrium interest rate and level of output?

Q: Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change?

Q: Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government stimulus was overwhelmed by the continuing deterioration in credit market conditions. Everything else held constant and using the ISLM model, the net effect would cause the ________ curve to ________ and output will ________. A) IS; shift left; decrease B) IS; shift right; increase C) LM; shift right; increase D) LM shift left; decrease

Q: Which of the following statements concerning Keynesian ISLM analysis is true? A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. C) A fall in the money supply shifts the LM curve to the right. D) Expansionary fiscal policy will cause the interest rate to fall.

Q: If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________. A) fiscal; expansionary B) fiscal; contractionary C) monetary; expansionary D) monetary; contractionary

Q: Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if A) consumer confidence decreases sharply. B) there is an investment boom. C) the money supply increases. D) taxes are cut.

Q: An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant. A) fiscal; rise B) fiscal; fall C) incomes; rise D) incomes; fall

Q: Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes. A) positively; positively B) positively; negatively C) negatively; positively D) negatively; negatively

Q: Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall. A) monetary; monetary B) monetary; fiscal C) fiscal; monetary D) fiscal; fiscal

Q: In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: In the ISLM framework, an expansionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling

Q: A contractionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output

Q: Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling

Q: An expansionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output

Q: In the ISLM framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

Q: An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right

Q: An autonomous decrease in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right

Q: When the central bank ________ the money supply, the LM curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant. A) increases; fall; increases B) increases; rise; decreases C) decreases; rise; decreases D) decreases; fall; increases

Q: An increase in the money supply shifts the LM curve to the right, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: An increase in the money ________ shifts the LM curve to the ________, causing the interest rate to fall and output to rise, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left

Q: A decline in the money supply shifts the LM curve to the left, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: A decline in the money ________ shifts the LM curve to the ________, causing the interest rate to rise and output to fall, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left

Q: A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right

Q: An increase in the quantity of money supplied shifts the money supply curve to the ________ and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right

Q: A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises

Q: An increase in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises

Q: If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the left, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases

Q: If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the right, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases

Q: If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left

Q: If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left

Q: An increase in the money supply, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right

Q: If the economy is on the LM curve, but is to the right of the IS curve, then the ________ market is in equilibrium, but aggregate ________ exceeds aggregate ________. A) goods; output; demand B) goods; demand; output C) money; output; demand D) money; demand; output

Q: If the economy is on the IS curve, but is to the left of the LM curve, then the ________ market is in equilibrium, but the interest rate is ________ the equilibrium level. A) goods; below B) goods; above C) money; below D) money; above

Q: If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: If the economy is on the IS curve, but is to the left of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: If the economy is on the LM curve, but is to the right of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall

Q: When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________. A) aggregate output; price level B) aggregate output; interest rate C) money supply; price level D) consumer expenditures; interest rate

Q: Macroeconomic equilibrium requires A) equilibrium in the goods market. B) equilibrium in the money market. C) equilibrium in both the goods and money markets. D) equilibrium in neither the goods nor the money market.

Q: Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to rise. A) right; supply B) right; demand C) left; supply D) left; demand

Q: Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to fall. A) right; supply B) right; demand C) left; supply D) left; demand

Q: Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess demand of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise

Q: Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess supply of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise

Q: Everything else held constant, if aggregate output is to the left of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise

Q: Everything else held constant, if aggregate output is to the right of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise

Q: As aggregate output rises, the demand for money ________ and the interest rate ________, so that money demanded equals money supplied and the money market is in equilibrium. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls

Q: As interest rates rise, the opportunity cost of holding money ________ and the demand for money ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

Q: According to the liquidity preference theory, the demand for money is ________ related to aggregate output and ________ related to interest rates. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively

Q: In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively

Q: The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied. A) IS curve B) LM curve C) consumption function D) investment schedule

Q: The money market is in equilibrium A) at any point on the IS curve. B) at any point on the LM curve. C) at only one point on the LM curve. D) only at the intersection of the IS and LM curves.

Q: Because inflation was not a serious problem during the Great Depression, Keynes's analysis assumed A) that unemployment also was not a problem. B) that the money supply was fixed. C) that the price level was fixed. D) that monetary policy is not effective.

Q: 26.1 Keynes' Fixed Price Level Assumption and the IS Curve

Q: Tobin's q theory suggests that monetary policy may affect investment spending through its impact on A) stock prices. B) interest rates. C) bond prices. D) cash flow.

Q: Tobin's q is defined as the market value of firms ________ the replacement cost of capital. A) times B) minus C) plus D) divided by

Q: A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar. A) lowering real; decreasing B) lowering real; increasing C) raising nominal; increasing D) raising real; increasing

Q: A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering

Q: An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar. A) lowering nominal; decreasing B) lowering real; decreasing C) raising nominal; increasing D) raising real; increasing

Q: An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering

Q: If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel. A) asset; labor B) asset; credit C) commodity; labor D) commodity; credit

Q: If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers A) only the short-term nominal interest rate. B) only the short-term real interest rate. C) both the short-term nominal and real interest rates. D) the short-term nominal, the short-term real, and the long-term real interest rates.