Deck 21: Is-Lm

Question 1

If the marginal propensity to consume is 0.75, the multiplier is 4.

Answer 1

True

Question 2

The IS curve is upward sloping.

Answer 2

False

Question 3

Income and disposable income are the same if taxes are zero.

Answer 3

True

Question 4

Interest rates are negatively related to I and NX.

Question 5

The G in the equation for the components of aggregate demand should include state and local government spending.

Question 6

When Sam buys stock in Ford, I increases.

Question 7

One reason investment is inversely related to the interest rate is that higher interest rates mean a higher cost of borrowing.

Question 8

Aggregate demand is composed of consumption, investment, government spending and imports.

Question 9

In the Keynesian cross model, if taxes rise the same amount as government spending, the equilibrium output falls.

Question 10

A decrease in the interest rate shifts the IS curve to the left.

Question 11

If autonomous consumption falls, then the consumption function becomes steeper.

Question 12

In the Keynesian cross model, if consumers save a larger portion of disposable income, equilibrium GDP rises.

Question 13

According to the Keynesian cross model, if the marginal propensity to consume is 0.9, and government spending rises by $200, then equilibrium output rises by $380.

Question 14

If imports decrease, then equilibrium output falls.

Question 15

The LM curve is the equilibrium pairs of output and the interest rate in the goods market.

Question 16

The IS curve is the equilibrium pairs of output and the interest rate in the goods market.

Question 17

An increase in net exports shifts the aggregate demand function up.

Question 18

The marginal propensity to consume is the slope of the consumption function.

Question 19

Milton Friedman was a major contributor to the formation of the IS-LM model.

Question 20

A decrease in taxes increases equilibrium output through its effect on consumption.

Question 21

If government spending decreases, then output _____ by _____ than the change in spending.

A) increases, more
B) increases, less
C) decreases, more
D) decreases, less

Question 22

At a point to the right of the IS curve, there is an excess supply of goods.

Question 23

When taxes increase and all else stays constant, the IS curve

A) shifts to the left.
B) shifts to the right.
C) stays the same.
D) none of the above.

Question 24

A high interest rate is associated with a strong currency, which leads to low net exports.

Question 25

The larger the effect of changes in output on money demand, the flatter the LM curve is.

Question 26

The consumption function shifts down if _____ fall(s).

A) taxes
B) autonomous consumption
C) government spending
D) none of the above

Question 27

The steeper the consumption function the higher the multiplier.

Question 28

One reason investment is inversely related to the interest rate is that higher interest rates means government bonds are a less attractive investment.

Question 29

If the marginal propensity to consume is 0.95 and government spending falls by $200, then equilibrium output on the Keynesian cross diagram (for a fixed interest rate) rises by

A) $180.
B) $200.
C) $380.
D) none of the above.

Question 30

In a country where investment is relatively insensitive to changes in the interest rate, the IS curve is steeper.

Question 31

If the marginal propensity to consume is 0.8, then the multiplier is

A) 0.2.
B) 1.2
C) 1.25
D) 5.0.

Question 32

An excess demand for money leads to an increase in interest rates for a given level of output.

Question 33

If the marginal propensity to consume rises, then the consumption function on the Keynesian cross diagram

A) shifts up.
B) shifts down.
C) becomes flatter.
D) becomes steeper.

Question 34

In the Keynesian cross model, equilibrium output rises if _____ rise(s).

A) government spending
B) the mpc
C) net exports
D) all of the above

Question 35

At a point to the right of the LM curve, there is an excess supply of money.

Question 36

The IS curve is the combination of output and the interest rate, where investment equals savings.

Question 37

The price level is an exogenous variable in the IS-LM model.

Question 38

Federal government expenditures are several times greater than state and local government expenditures in the United States.

Question 39

Investment fell leading up to each recession in the United States in the 1900s.

Question 40

Net exports is

A) imports minus exports.
B) exports minus inputs.
C) consumption minus exports.
D) exports minus consumption.

Question 41

Points to the right of the LM curve show an excess

A) demand for goods.
B) demand for money.
C) supply of goods.
D) supply of money.

Question 42

G in the aggregate demand equation represents

A) federal government spending.
B) state government spending.
C) local government spending.
D) all of the above.

Question 43

Using the Keynesian cross, if autonomous consumption is $200, government spending and taxes are $300, investment is $100, net exports is $100, and the marginal propensity to consume is 0.5, find equilibrium output.

A) $600
B) $750
C) $1,400
D) none of the above

Question 44

If interest rates fall, which of the following would rise due to the impact on the exchange rate?

A) exports
B) imports
C) investment
D) all of the above

Question 45

On the Keynesian cross diagram, an increase in which of the following would cause the aggregate demand function to shift up?

A) autonomous consumption
B) exports
C) investment
D) all of the above

Question 46

If the mpc is 0.75, and government spending and taxes both rise by $100, then equilibrium output

A) falls by $100.
B) falls by $25.
C) rises by $25.
D) rises by $100.

Question 47

If autonomous consumption is $200, disposable income is $1000 and the marginal propensity to consume is 0.9, then consumption is

A) $900.
B) $1,000.
C) $1100.
D) $1,200.

Question 48

During a financial panic, the LM curve

A) shifts left.
B) shifts right.
C) stays the same.
D) none of the above

Question 49

On the Keynesian cross diagram, a decrease in which of the following would cause the aggregate demand function to shift up?

A) autonomous consumption
B) taxes
C) investment
D) none of the above

Question 50

If interest rates rise, which of the following would fall?

A) mpc
B) investment
C) imports
D) government spending

Question 51

If interest rates rise, which of the following would rise?

A) exports
B) imports
C) investment
D) all of the above

Question 52

Using the Keynesian cross, if autonomous consumption is $100, government spending and taxes are $200, investment is $100, net exports are zero, and the marginal propensity to consume is 0.8, find equilibrium output.

A) $720
B) $1,000
C) $1,200
D) none of the above

Question 53

Using the Keynesian cross, if autonomous consumption is $200 and investment is $400, and the marginal propensity to consume is 0.75, while government spending, net exports and taxes are zero, then equilibrium output is

A) $450.
B) $600.
C) $1,050.
C) none of the above.

Question 54

The IS curve slopes down because as the interest rate rises

A) borrowing costs rise.
B) the net present value of business projects falls.
C) the domestic currency strengthens, dampening export demand.
D) all of the above.

Question 55

If interest rates rise, which of the following would fall?

A) taxes
B) autonomous consumption
C) investment
D) all of the above

Question 56

Points to the left of the IS curve show an excess __________.

A) demand for goods.
B) demand for money.
C) supply of goods.
D) supply of money.

Question 57

Using the Keynesian cross, if autonomous consumption is $300 and investment is $200, and the marginal propensity to consume is 0.9, while government spending, net exports and taxes are zero, then equilibrium output is
a) $450.
b) $500.
c) $5,000.
(d, easy, section 1)
c) $950.

Question 58

Fiscal stimulus includes

A) government spending.
B) decreasing taxes.
C) both of the above.
D) none of the above

Question 59

If the interest rate rises, then _____ falls due to a(n) _____ of the exchange rate.

A) exports, appreciation
B) exports, depreciation
C) imports, appreciation
D) imports, depreciation

Question 60

In the Keynesian cross model, if the government lowers taxes, then ___ rises.

A) consumption
B) disposable income
C) equilibrium output
D) all of the above

Question 61

What are the four components of aggregate demand?

Question 62

If autonomous consumption is $50, disposable income is $500 and the marginal propensity to consume is 0.8, find C.

Question 63

What is the marginal propensity to consume?

Question 64

"Fiscal stimulus" could be represented by an increase in _____ in the aggregate demand function.

A) C
B) I
C) G
D) NX

Question 65

Country A is a closed economy so imports and exports are zero. Country B does trade but has no trade deficit (NX = 0) and is otherwise identical to Country A. What is the difference in the IS-LM graph for both countries?

Question 66

Draw a Keynesian cross diagram and show how an increase in government spending would affect equilibrium output.

Question 67

What does the multiplier measure?

Question 68

An increase in government spending $\Delta$ G that is paid for by an identical increase in taxes increases equilibrium output by $\Delta$ Gm regardless of the mpc. Prove.

Question 69

Draw a Keynesian cross diagram and show how a decrease in investment would affect equilibrium output.

Question 70

Over the period 1990-2008, NX for the United States has been

A) positive.
B) negative.
C) both of the above.
D) neither of the above.

Question 71

Explain the difference between a fiscal stimulus and a monetary stimulus.

Question 72

Using the Keynesian cross, if autonomous consumption is $400, government spending is $50, investment is $200, net exports and taxes are zero, and the marginal propensity to consume is 0.8, find equilibrium output.

Question 73

Using the Keynesian cross, if autonomous consumption is $500, government spending and taxes are $200, investment is $100, net exports are zero, and the marginal propensity to consume is 0.9, find equilibrium output.

Question 74

If government spending and taxes fall by the same amount, what would be the impact on equilibrium output in the Keynesian cross model? Explain in words.

Question 75

Which of the following is not an endogenous variable in the IS-LM model?

A) interest rate
B) price level
C) output
D) none of the above