Deck 9: The IS-LM/AD-AS Model

Question 1

The FE line

A)is horizontal.
B)is vertical.
C)slopes downward.
D)slopes upward.

Answer 1

B

Question 2

The FE line shows the level of output at which the ________ market is in equilibrium.

A)Goods
B)Asset
C)Labor
D)Money

Answer 2

C

Question 3

The IS curve

A)is horizontal.
B)is vertical.
C)slopes downward.
D)slopes upward.

Answer 3

C

Question 4

A decline in expected future output would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question 5

Which of the following curves in the IS-LM model is vertical?

A)The IS curve
B)The LM curve
C)The FE line
D)The AD curve

Question 6

A beneficial supply shock would cause the FE line to

A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if the shock is temporary; shift to the right if the shock is permanent.

Question 7

Identify changes in three variables that would cause the FE line to shift to the right.

Question 8

At a given output level,a temporary reduction in government purchases will

A)increase desired saving,causing the IS curve to shift down and to the left.
B)increase desired saving,causing the IS curve to shift up and to the right.
C)decrease desired saving,causing the IS curve to shift down and to the left.
D)decrease desired saving,causing the IS curve to shift up and to the right.

Question 9

An adverse supply shock would cause the FE line to

A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if the shock is temporary; shift to the right if the shock is permanent.

Question 10

Describe what happens to the FE line if government purchases increase.

Question 11

The IS curve shows the combinations of output and the real interest rate for which

A)the goods market is in equilibrium.
B)the labor market is in equilibrium.
C)the financial asset market is in equilibrium.
D)an increase in output will cause the market-clearing interest rate to be bid up.

Question 12

An increase in labor supply would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question 13

Which of the following would shift the FE line to the left?

A)A beneficial supply shock
B)An increase in labor supply
C)A decrease in the capital stock
D)A decrease in the future marginal productivity of capital

Question 14

An increase in the money supply would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question 15

The FE line is vertical because the level of output at full employment doesn't depend on the

A)real wage rate.
B)level of employment.
C)marginal product of labor.
D)real interest rate.

Question 16

Which of the following would shift the FE line to the right?

A)An adverse supply shock
B)An increase in labor supply
C)A decrease in the capital stock
D)An increase in the future marginal productivity of capital

Question 17

An increase in investment spending would cause the FE line to

A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if Ricardian equivalence holds; otherwise,shift to the right.

Question 18

An increase in the money supply would cause the FE line to

A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if Ricardian equivalence holds; otherwise,shift to the right.

Question 19

A decrease in the effective tax rate on capital would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)remain unchanged if taxes are fully deductible from income; otherwise,shift up and to the right.

Question 20

Any change that reduces desired saving relative to desired investment (for a given level of output)causes the real interest rate to ________ and shifts the IS curve ________.

A)increase; down and to the left
B)increase; up and to the right
C)decrease; down and to the left
D)decrease; up and to the right

Question 21

The IS curve would unambiguously shift up and to the right if there were

A)an increase in both government purchases and corporate taxes.
B)an increase in both government purchases and the expected future marginal product of capital.
C)an increase in the expected future marginal product of capital and a decrease in expected future output.
D)a decrease in both corporate taxes and the expected future marginal product of capital.

Question 22

Looking at the macroeconomic statistics for Friedmanland,you discover that at the beginning of the year,the national money supply was equal to $400 million and by the end of the year it was equal to $420 million.You also found out that the inflation rate in Friedmanland was 7%.In this case,you would expect the LM curve to

A)shift up and to the left as the real money supply falls.
B)shift up and to the left as the real money supply rises.
C)shift down and to the right as the real money supply falls.
D)shift down and to the right as the real money supply rises.

Question 23

Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%.This action would

A)increase money demand,shifting the LM curve up and to the left.
B)increase money demand,shifting the LM curve down and to the right.
C)decrease money demand,shifting the LM curve up and to the left.
D)decrease money demand,shifting the LM curve down and to the right.

Question 24

A temporary decline in productivity would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question 25

A change that increases the real money supply relative to real money demand causes

A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)the IS curve to shift down and to the left.
D)the IS curve to shift up and to the right.

Question 26

A decline in the price of a bond causes the yield of the bond to

A)rise.
B)fall.
C)remain unchanged.
D)rise if it's a short-term bond,fall if it's a long-term bond.

Question 27

An increase in wealth that doesn't affect labor supply would cause the IS curve to ________ and the FE line to ________.

A)shift down and to the left; be unchanged
B)shift down and to the left; shift left
C)shift up and to the right; be unchanged
D)shift up and to the right; shift left

Question 28

Draw a saving-investment diagram to show how each of the following changes shifts the IS curve.
(a)Future income rises.
(b)The future marginal productivity of capital increases.
(c)Government purchases decrease temporarily.
(d)The effective corporate tax rate increases.

Question 29

Looking only at the asset market,an increase in output would cause

A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)an increase in the real interest rate along the LM curve.
D)a decrease in the real interest rate along the LM curve.

Question 30

If the money supply is increased,which curve shifts in the IS-LM model? What direction does it shift? What is the intuition behind this shift?

Question 31

The IS curve will shift down and to the left when

A)desired saving declines.
B)government purchases increase.
C)consumption increases.
D)the expected future marginal product of capital declines.

Question 32

The Fed has announced that it plans to lower the rate of monetary growth from 10% per year to 2% per year.You would expect this announcement to directly

A)increase money demand,shifting the LM curve up and to the left.
B)increase money demand,shifting the LM curve down and to the right.
C)decrease money demand,shifting the LM curve up and to the left.
D)decrease money demand,shifting the LM curve down and to the right.

Question 33

A change that increases real money demand relative to the real money supply causes

A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)the IS curve to shift down and to the left.
D)the IS curve to shift up and to the right.

Question 34

Calculate the real money supply growth rate when the nominal money supply increases by 10% and the price level increases by each of the following percentages: a)2%; b)8%; c)10%; d)15%.

Question 35

A decrease in wealth would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question 36

You have just read that the Federal Reserve has increased the money supply to avoid a recession.For a given price level,you would expect the LM curve to

A)shift up and to the left as the real money supply falls.
B)shift up and to the left as the real money supply rises.
C)shift down and to the right as the real money supply falls.
D)shift down and to the right as the real money supply rises.

Question 37

The probably effect of introducing an increased number of automatic teller machines is to

A)increase money demand,shifting the LM curve up and to the left.
B)increase money demand,shifting the LM curve down and to the right.
C)decrease money demand,shifting the LM curve up and to the left.
D)decrease money demand,shifting the LM curve down and to the right.

Question 38

A rise in the price of a bond causes the yield of the bond to

A)rise.
B)fall.
C)remain unchanged.
D)rise if it's a short-term bond,fall if it's a long-term bond.

Question 39

An increase in the expected future marginal product of capital would cause the IS curve to

A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)remain unchanged if firms face borrowing constraints; otherwise,shift down and to the left.

Question 40

The LM curve

A)is horizontal.
B)is vertical.
C)slopes downward.
D)slopes upward.

Question 41

Suppose the intersection of the IS and LM curves is to the left of the FE line.What would most likely eliminate a disequilibrium among the asset,labor,and goods markets?

A)A rise in the price level,shifting the LM curve up and to the left
B)A fall in the price level,shifting the LM curve down and to the right
C)A rise in the price level,shifting the IS curve up and to the right
D)A fall in the price level,shifting the IS curve down and to the left

Question 42

A decrease in the money supply would cause the IS curve to ________ and the LM curve to ________.

A)shift down and to the left; be unchanged
B)shift down and to the left; shift up and to the left
C)be unchanged; shift up and to the left
D)be unchanged; shift down and to the right

Question 43

A temporary supply shock,such as a bumper crop,would

A)shift the FE line to the right and leave the IS curve unchanged.
B)shift the FE line to the left and shift the IS curve up and to the right.
C)shift the FE line to the left and leave the IS curve unchanged.
D)have no effect on the FE line.

Question 44

A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 45

To reach general equilibrium,the price level adjusts to shift the ________ until it intersects with the ________.

A)IS curve; FE line and LM curve
B)FE line; LM and IS curves
C)LM curve; FE line and IS curve
D)ND curve; FE line and NS curve

Question 46

An increase in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 47

Suppose the intersection of the IS and LM curves is to the left of the FE line.A decrease in the price level would most likely eliminate a disequilibrium among the asset,labor,and goods markets by

A)shifting the LM curve down and to the right.
B)shifting the IS curve up and to the right.
C)shifting the IS curve down and to the left.
D)shifting the FE curve to the left.

Question 48

A temporary decrease in government purchases causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 49

A temporary supply shock,such as an increase in oil prices,would

A)shift the IS curve down and to the left and leave the FE line unchanged.
B)shift the IS curve down and to the left and shift the FE line to the left.
C)shift the IS curve up and to the right,but leave the FE line unchanged.
D)have no effect on the IS curve.

Question 50

You have just read that Australia has suffered a drought,destroying its wheat crop for this year.The effect of this adverse supply shock on Australia would probably be

A)an increase in prices and an increase in real interest rates.
B)an increase in prices,an increase in nominal interest rates,but a decrease in real interest rates.
C)a decrease in prices and a decrease in real interest rates.
D)a decrease in prices,a decrease in nominal interest rates,but an increase in real interest rates.

Question 51

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

A)The LM curve
B)The IS curve
C)The FE line
D)The labor demand curve

Question 52

After a temporary beneficial supply shock hits the economy,general equilibrium is restored by

A)a shift down and to the left of the IS curve.
B)a shift to the left of the FE line.
C)a shift up and to the left of the LM curve.
D)a shift down and to the right of the LM curve.

Question 53

The IS-LM model predicts that a temporary beneficial supply shock

A)increases output,national saving,and investment,but not the real interest rate.
B)increases output,national saving,and the real interest rate,but not investment.
C)increases the real interest rate,investment,and output,but not national saving.
D)increases output,national saving,investment,and the real interest rate.

Question 54

What adjusts to restore general equilibrium after a shock to the economy?

A)The LM curve
B)The IS curve
C)The FE line
D)The labor supply curve

Question 55

Which market adjusts the quickest in response to shocks to the economy?

A)The asset market
B)The labor market
C)The goods market
D)The asset,labor,and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy.

Question 56

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 57

An increase in the effective tax rate on capital would cause the IS curve to ________ and the LM curve to ________.

A)shift down and to the left; be unchanged
B)shift down and to the left; shift up and to the left
C)shift up and to the right; be unchanged
D)shift up and to the right; shift up and to the left

Question 58

A temporary adverse supply shock directly causes

A)a shift down and to the left of the IS curve.
B)a shift to the left of the FE line.
C)a shift down and to the right of the LM curve.
D)a shift up and to the right of the IS curve.

Question 59

Suppose the intersection of the IS and LM curves is to the right of the FE line.What would most likely eliminate a disequilibrium among the asset,labor,and goods markets?

A)A rise in the price level,shifting the LM curve up and to the left.
B)A fall in the price level,shifting the LM curve down and to the right.
C)A rise in the price level,shifting the IS curve up and to the right.
D)A fall in the price level,shifting the IS curve down and to the left.

Question 60

When all markets in the economy are simultaneously in equilibrium,we say

A)markets are complete.
B)markets are perfect.
C)there is disequilibrium.
D)there is general equilibrium.

Question 61

In classical IS-LM analysis,the effects of a decline in desired investment include

A)a decline in output.
B)an increase in the price level.
C)a decline in the real interest rate.
D)an increase in unemployment.

Question 62

A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise
D)fall; fall

Question 63

A decrease in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 64

For each of the following changes,what happens to the real interest rate and output in the very short run,before the price level has adjusted to restore general equilibrium?
(a)Wealth rises.
(b)Money supply rises.
(c)The future marginal productivity of capital increases.
(d)Expected inflation declines.
(e)Future income declines.

Question 65

Keynesian economists think general equilibrium is not attained quickly because

A)the real interest rate adjusts slowly.
B)the level of output adjusts slowly.
C)the real wage rate adjusts slowly.
D)the price level adjusts slowly.

Question 66

Under monetary neutrality,an increase in the money supply causes output to ________ and the price level to ________.

A)rise; rise
B)rise; not change
C)not change; not change
D)not change; rise

Question 67

Classical economists believe that in the short run,

A)money neutrality exists and prices adjust rapidly.
B)money neutrality does not exist and prices adjust rapidly.
C)money neutrality exists and prices do not adjust rapidly.
D)money neutrality does not exist and prices do not adjust rapidly.

Question 68

Oil prices have risen temporarily,due to political uncertainty in the Middle East.An advisor to the Fed suggests,"Higher oil prices reduce aggregate demand.To offset this we must increase the money supply.Then the price level won't need to adjust to restore equilibrium,and we'll prevent a recession." Analyze this statement using the IS-LM model.

Question 69

Classical economists think general equilibrium is attained relatively quickly because

A)the real interest rate adjusts quickly.
B)the level of output adjusts quickly.
C)the real wage rate adjusts quickly.
D)the price level adjusts quickly.

Question 70

Analyze the following statement,and show what would happen in the long run if such advice were followed by the Fed: "The increase in the stock market has increased people's wealth.As a result,their consumption has increased,increasing aggregate demand and output.So the Fed needs to increase the money supply,since with higher income,people's demand for real money balances will be higher."

Question 71

Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G,and desired investment is Id = 100 - 500r.Real money demand is Md/P = Y - 2000i.Other variables are ?e = 0.05,G = 200, = 1000,and M = 2100.
(a)Find the equilibrium values of the real interest rate,consumption,investment,and the price level.
(b)Suppose the money supply increases to 2800.Find the equilibrium values of the real interest rate,consumption,investment,and the price level.(Assume that the expected inflation rate is unchanged.)

Question 72

Suppose the Federal Reserve's short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate.What would happen to money supply if there were a reduction in government purchases? Given the Fed's policy,what would happen in the very short run (before general equilibrium is restored)to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium?

Question 73

Classical economists believe that a market economy will normally

A)suffer from extended periods of sustained unemployment.
B)achieve full-employment output.
C)degenerate into pure monopolies in most industries.
D)eliminate the problem of economic scarcity.

Question 74

An increase in taxes (when Ricardian equivalence doesn't hold)causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 75

Suppose you were a forecaster of the real wage rate,employment,output,the real interest rate,consumption,investment,and the price level.A shock hits the economy,which you think is a temporary adverse supply shock.
(a)What are your forecasts for each of the variables listed above (rise,fall,and no change)?
(b)What if the shock was really due to people's reduced expectations about their future income.Which variables did you forecast correctly,and which did you forecast incorrectly?

Question 76

Desired consumption is Cd = 2000 + 0.9Y - 100,000r - G,and desired investment is Id = 1000 - 45,000r.Real money demand is Md/P = Y - 6000i.Other variables are ?e = 0.03,G = 500, = 1000,and M = 2100.
(a)Find the equilibrium values of the real interest rate,consumption,investment,and the price level.
(b)Suppose government purchases decline to 400.What happens to the variables listed in part (a)?
(c)Suppose government purchases rise to 600.What happens to the variables listed in part (a)?
(d)What feature in this example leads to the result that you don't need to know the amount of taxes collected by the government to find the equilibrium?

Question 77

An increase in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise
D)fall; fall

Question 78

Keynesian economists believe that in the short run,

A)money neutrality exists and prices adjust rapidly.
B)money neutrality does not exist and prices adjust rapidly.
C)money neutrality exists and prices do not adjust rapidly.
D)money neutrality does not exist and prices do not adjust rapidly.

Question 79

For each of the following changes,which equilibrium curve (IS,LM,or FE)is shifted? Draw the change in the underlying demand or supply curves (for example,money demand and supply for the LM curve)and show how the equilibrium curve changes.
(a)Expected inflation increases.
(b)The future marginal productivity of capital increases.
(c)Labor supply decreases.
(d)Future income declines.
(e)There's a temporary beneficial supply shock.
(f)The nominal interest rate on money rises.

Question 80

Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage,employment,output,the real interest rate,consumption,investment,and the price level.
(a)Tougher immigration laws reduce the working-age population.
(b)There's increased volatility in the prices of stocks and bonds.
(c)The government tries to achieve tax equity by an increase in the corporate tax rate.
(d)Increased computerization reduces stock market brokerage costs.