Deck 28: The ISLM Model

Question 1

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

Answer 1

B

Question 2

The key assumption in the ISLM model is that ________.

A) the price level is fixed
B) the inflation rate is zero
C) there is no role for interest rates
D) Both A and B.

Answer 2

D

Question 3

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

Answer 3

B

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Describe the key assumption that drives Keynes's ISLM model.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

Discuss the IS-LM curves and how the equilibrium in the goods and money market is achieved.

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

If the money supply increases,everything else held constant,the ________ curve shifts to the ________.

A) IS; right
B) IS; left
C) LM; left
D) LM; right

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

If the money demand decreases,everything else held constant,the ________ curve shifts to the ________.

A) IS; right
B) IS; left
C) LM; left
D) LM; right

Question 58

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

Question 59

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

Question 60

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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.

Question 71

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

Question 72

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?

Question 73

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?

Question 74

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

Question 75

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

Question 76

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?

Question 77

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

Question 78

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

Question 79

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

Question 80

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