Deck 6: Keynesian System II: Money,interest,and Income

Question 1

If the central bank of an economy follows a policy of interest rate targeting,or maintaining a fixed interest rate,then what will happen to the slope of the LM curve? Draw a graph to illustrate.

Answer 1

The LM curve will be flat at the interest rate the central bank chooses to target,meaning that income will have to make the full adjustment for any change in the IS curve.

Question 2

What happens to inventories on all points that are below the IS curve? Are unplanned inventories positive or negative? Explain.

Answer 2

Below the IS curve,for a given interest rate income is lower than equilibrium income.As a result,unplanned inventories would be positive.

Question 3

If the consumption function is given by C = 200 + 0.6Y_D,then an increase in taxes of 50 units will cause the IS schedule to

A)shift to the right by 75 units..
B)shift to the left by 50 units.
C)shift to the left by 75 units.
D)shift to the left by 125.

Answer 3

C

Question 4

Keynes considered three motives for holding money.Which of these was similar to the classical quantity theory of money demand? Which is unique to Keynesian theory?

Question 5

A decline in the money stock will

A)shift the LM schedule to the right.
B)shift the LM schedule to the left.
C)not have any effect on the LM schedule.
D)shift the IS schedule downward and to the right.

Question 6

In the Keynesian theory,an exogenous decrease in the demand for money shifts

A)the LM curve to the right.
B)the LM curve to the left.
C)the IS curve to the right.
D)the IS curve to the left.
E)neither the IS or LM curves.

Question 7

Suppose that the money supply in addition to money demand increases when the interest rate increases.How do you think this change from the basic Keynesian money market would affect the slope of the LM curve? Draw a graph to illustrate.

Question 8

If people increase their expected rate of interest,the speculative demand for money curve will _____ and money supply will _____.

A)shift downward,remain unchanged.
B)shift upward; remain unchanged.
C)not be affected; shifts upward.
D)not be affected; not be affected.

Question 9

Suppose that there is an unexpected increase in the demand for money at every level of interest rates and income.What happens to equilibrium interest rates and income as a result? Provide an IS/LM curve to illustrate.

Question 10

Assume that following equations describe the money market of an economy

Question 11

What is meant by a "liquidity trap?"

Question 12

If the consumption function is given by C = 100 + 0.75(Y-T),then an increase of 10 units in taxes will cause the IS schedule to shift to the right by

A)-30 units.
B)-10 units.
C)30 units.
D)40 units.

Question 13

Compare and contrast the effects of an increase in the money supply on interest rates within the Keynesian and Classical model.Provide graphs to illustrate.Discuss why the results differ between these models.

Question 14

A fall in autonomous investment will shift the

A)IS curve to the right toward higher interest rates and output.
B)LM curve to the right towards lower interest rates and higher output.
C)IS curve to the left towards higher interest rates and output.
D)None of the above

Question 15

Assume the following equations describe the goods market of an economy

Question 16

Assume that the government passes a deficit-financed tax cut.If the central bank would like to keep interest rates constant,what monetary policy should they follow? Provide an IS/LM graph to illustrate.

Question 17

List three changes in exogenous variables that would shift the IS curve to the right.

Question 18

Household consumption likely depends upon accumulated wealth and not just current income as it does in the basic Keynesian model examined in this chapter.How would the IS/LM model respond to a decline in housing prices,such as what occurred in the US during the 2008 global financial crisis,if consumption was a function of wealth.Provide a graph to illustrate.

Question 19

If savings becomes more interest rate elastic,what happens to the slope of the IS curve.Provide a graph to illustrate.

Question 20

In the Keynesian money market,velocity is

A)negatively related to the interest rate.
B)independent of the interest rate.
C)positively related to the interest rate.
D)is positively related to the money supply.
E)is not related to the interest rate but income.

Question 21

The IS curve represents

A)equilibrium in the money market.
B)all outcomes where Y=C+I+G in a closed economy.
B)all points where there is no excess demand or excess supply.
C)equilibrium in the labor market.

Question 22

Along any IS curve

A)both government spending and expectations are fixed.
B)government spending and the price level may vary.
C)consumption and the price level are fixed.
D)both government spending and tax rates may vary.
E)all of the above

Question 23

According to Keynes,the speculative demand for money pertains to money held in anticipation of a(n)

A)increase in bond prices.
B)decrease in bond prices.
C)rise in interest rates.
D)fall in interest rates.
E)both b and c

Question 24

Panel (b)in Figure 6.1 reflects

A)low interest elasticity of money demand.
B)money demand to be highly interest elastic.
C)money demand to be completely interest insensitive.
D)None of the above

Question 25

Assume that you purchased a $1,000 perpetual bond that pays a market interest rate of 5 percent.If you attempted to sell this bond today subsequent to an increased market rate of interest of 7.5 percent,then you

A)could only sell this bond at a capital loss.
B)could sell this bond at a capital gain.
C)would not be able to sell this bond.
D)could exchange your bond yielding 5 percent for a bond yielding 7.5 percent on an even exchange basis.

Question 26

In the Keynesian theory of money demand,

A)the velocity of money is constant.
B)the marginal propensity to hold money is constant.
C)money is held in part because it is an asset.
D)interest rates are fixed.
E)none of the above.

Question 27

Assuming that money demand is completely interest insensitive,the

A)LM schedule will be horizontal.
B)LM schedule will be vertical.
C)IS schedule is vertical.
D)IS schedule is horizontal.

Question 28

The intuition behind the slope of the LM curve is that

A)as the interest rate increases,the money supply increases and income increases.
B)as the interest rate increases,investment and income decreases.
C)as income increases,money demand increases which increases interest rates.
D)as income increases,money demand decreases which decreases interest rates.
E)none of the above.

Question 29

If Y>C+I+G but M^d= M^s,then

A)interest rates must rise and output must fall.
B)both interest rates and output must fall.
C)interest rates must fall and output must rise.
D)both interest rates and output must rise.
E)none of the above.

Question 30

If the MPC is 0.6,then a 50-unit rise in taxes and a 50-unit rise in government spending will shift the IS curve

A)to the right by 50 units.
B)to the right by 75 units.
C)to the left by 125 units.
D)to the left by 75 units.

Question 31

Assume that the economy is presently in equilibrium.A decline in the interest rate

A)increases planned investment,aggregate demand,and equilibrium income.
B)increases unplanned investment,reducing aggregate demand and equilibrium income_.
C)increases unplanned investment,increasing aggregate demand and equilibrium income.
D)increases money demand,the money supply,aggregate demand,and equilibrium income.

Question 32

According to the Keynesian model of the money market,the supply of money

A)depends on the interest rate.
B)is chosen by the central bank.
C)varies with the price level.
D)varies with income.

Question 33

If the money demand function is given by M^d = 10 + 0.2Y − 10r then a 10-unit increase in the quantity of money will cause the LM schedule to shifts to

A)to the right by 10 units.
B)the right by 50 units.
C)to the left by 40 units.
D)to the left by 50 units.
E)to the right by 40 units.

Question 34

The LM curve slopes upward because

A)as income rises,savings rise,increasing output.
B)as interest rates rise,the money supply rises,increasing output.
C)as interest rates rise,planned investment must fall,increasing output.
D)as income increases,money demand rises,which increases interest rates.
E)none of the above.

Question 35

According to Keynes' theory of money demand,a low interest rate increases the likelihood of a capital ________ and ______ the interest elasticity of money demand.

A)gain on bonds; reduces.
B)gain on money; increases.
C)loss on bonds; reduces.
D)loss on money; increases.
E)none of the above.

Question 36

A shift in the LM curve to the left could be caused by

A)an increase in the price level.
B)a decrease in the money supply.
C)an increase in the precautionary demand for money.
D)all of the above.
E)none of the above.

Question 37

The IS curve slopes upward because

A)as income rises,savings rise and consumption falls,decreasing output.
B)as interest rates rise,the money supply rises,increasing output.
C)as interest rates rise,planned investment must fall,increasing output.
D)as income increases,money demand rises,which increases interest rates.

Question 38

A decrease in the price level,holding the nominal money supply constant,will shift the LM curve

A)upward and to the right.
B)downward and to the left.
C)downward and to the right.
D)upward and to the left.

Question 39

Which of the following factors cause the IS curve to shift?

A)A change the money supply.
B)A change in the level of taxes
C)An autonomous investment change that shifts the investment function
D)Both b and c
E)All of the above

Question 40

Panel (a)in Figure 6.1 depicts

A)low interest elasticity of money demand.
B)high interest elasticity of money demand.
C)no interest elasticity of money demand,which is the same as Panel (b).
D)None of the above

Question 41

The IS curve becomes steeper when there is

A)a higher marginal propensity to save.
B)a smaller parameter measuring the interest sensitivity of investment.
C)a lower marginal propensity to save.
D)Both a and b
E)Both b and c

Question 42

In the Keynesian system,an increase in the money stock would

A)increase the interest rate,which,in turn,would increase aggregate demand and income.
B)decrease the interest rate,which,in turn,would decrease aggregate demand and income.
C)decrease the interest rate,which,in turn,would increase aggregate demand and income.
D)decrease the interest rate but would have no effect on aggregate demand and income.

Question 43

If savings does not depend upon the interest rate,then

A)the IS curve is vertical.
B)the IS curve is horizontal.
C)the LM curve is horizontal.
D)the IS curve is still downward sloping.
E)none of the above.

Question 44

Which of the following is true about the LM curve?

A)Along the LM curve,actual expenditure is equal to planned expenditure.
B)The LM curve slopes upward and is consistent with a given level of income.
C)The LM cuve slopes upward for a given level of the money supply.
D)The LM curve is horizontal in the classical model.
E)none of the above.

Question 45

Keynes believed that the precautionary demand for money varied

A)negatively with income.
B)positively with income.
C)negatively with the interest rate.
D)positively with the interest rate.
E)Both b and c

Question 46

A relatively steep money demand schedule reflects the assumption that the interest elasticity of money demand is

A)low (in absolute value).
B)high (in absolute value).
C)zero.
D)indefinite.

Question 47

Points to the left of the LM schedule show that

A)the amount of money supplied exceeds the amount of money demanded.
B)saving plus taxes will exceed investment plus government purchases.
C)the amount of money demanded exceeds the amount of money supplied.
D)investment plus government purchases will exceed saving plus taxes.

Question 48

If M^d = 2,600 - 200r,the MPC = .75,G=100,and T = 100.If the central bank wants the interest rate to be r=2,then the money supply must be

A)5.
B)400
C)300
D)3,000
E)not enough information was given.

Question 49

If the central bank follows a monetary policy in which it maintains a fixed interest rate,then

A)the LM curve will get steeper.
B)the IS curve will get steeper.
C)the LM curve will become vertical.
D)the LM curve will become horizontal.
E)none of the above.

Question 50

If M^d = 1,000 - 400r and M^s = 2,000,the MPC = .85,G=100,and T = 120,then the equilibrium interest rate is

A)2.5
B)5
C)10
D)20
E)not enough information was given.

Question 51

In the classical model,

A)both fiscal and monetary policy will have larger impacts on income.
B)neither fiscal nor monetary policy can influence output.
C)monetary policy cannot influence output.
D)fiscal policy cannot influence output.
E)none of the above.

Question 52

If the current interest rate increases,

A)the money demand curve shifts downward and the money supply curve remains unchanged.
B)the money demand curve shifts upward and the money supply curve remains unchanged.
C)there is a movement along the money demand curve and the money supply curve increases.
D)there is a movement along the money demand curve and the money supply curve remains unchanged.

Question 53

With respect to the Keynesian liquidity trap,at very low levels of income,equilibrium in the money market occurs at points along the flat portion of the money demand schedule where

A)the elasticity of money demand is extremely high.
B)money demand is associated with a low interest elasticity.
C)money demand is completely interest inelastic.
D)None of the above

Question 54

The LM curve will become steeper when

A)there is a larger money demand increase per unit increase in income.
B)money demand is less sensitive to the interest rate.
C)money demand is more sensitive to the interest rate.
D)Both a and b
E)Both a and c

Question 55

Points to the right of the IS schedule indicate that

A)investment plus government spending will exceed saving plus taxes.
B)the amount of money supplied exceeds the amount of money demanded.
C)saving plus taxes will exceed investment plus government spending.
D)the amount of money demanded exceeds the amount of money supplied.

Question 56

In the IS-LM model,the two variables that are affected by the interest rate are

A)money supply and money demand.
B)money supply and investment spending.
C)money demand and consumption.
D)money demand and investment spending.
E)none of the above.

Question 57

If Y=C+I+G but M^d< M^s,then

A)interest rates must rise and output must fall.
B)both interest rates and output must fall.
C)interest rates must fall and output must rise.
D)both interest rates and output must rise.
E)none of the above.

Question 58

According to Keynes,a shift in liquidity preference is

A)a shift in the money demand schedule drawn against the interest rate as the level of income changes.
B)a change in the amount of money demanded for given levels of the interest rate and income.
C)a shift in individuals' portfolios away from bonds and toward holding an increased amount of money for given levels of the interest rate and income.
D)Either a or c
E)all of the above

Question 59

One of the most responsive components of investment to changes in interest rates are

A)equipment.
B)inventories.
C)automobile purchases.
D)residential housing.
E)none of the above.

Question 60

Assume that you purchased a $1,000 perpetual bond and the interest rate on that bond declined from 5 percent to 2 percent.Thus,

A)the bond price increased by $1,500.
B)you could sell this bond at a capital gain.
C)if this was anticipated,the speculative demand for money fell.
D)All of the above
E)None of the above

Question 61

If the money supply increases at the same time that taxes increase,then:

A)interest rates will definitely increase.
B)interest rates will definitely decrease.
C)income will definitely increase.
D)income will definitely decrease.

Question 62

The IS curve will shift to the right if:

A)the government deficit decreases.
B)consumer confidence decreases.
C)the MPC decreases.
D)taxes decrease.
E)the money supply increases.

Question 63

If the economy is in a liquidity trap,then:

A)fiscal policy can still stimulate the economy through lower interest rates.
B)monetary policy cannot stimulate the economy by lowering interest rates.
C)the precautionary demand for money is falling.
D)all of the above.