Deck 30: The ISLM Model

Question 1

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

Answer 1

LM curve

Question 2

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

Answer 2

aggregate output;interest rate

Question 3

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

Answer 3

rise;rise

Question 4

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 5

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 6

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 7

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

Question 8

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 9

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 10

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 11

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.

Question 12

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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

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 21

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

Question 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

An autonomous rise in ________ shifts the LM curve to the ________,everything else held constant.

A)net exports;right
B)net exports;left
C)money demand;right
D)money demand;left

Question 29

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

Question 30

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

Question 31

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 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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

Question 60

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 61

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

Question 62

The long-run neutrality of money refers to the fact that in the long run,monetary policy

A)changes only real output.
B)changes only the real interest rate.
C)changes both real output and the real interest rate.
D)has no effect on either real output or the real interest rate.

Question 63

In the long-run ISLM model and with everything else held constant,an increase in the money supply leaves the level of output and interest rates unchanged,an outcome called

A)interest rate overshooting.
B)long-run money neutrality.
C)long-run crowding out.
D)the long-run Phillips curve.

Question 64

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;fall;left
C)remains below;fall;right
D)remains below;rise;left

Question 65

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 66

In the long-run ISLM model and with everything else held constant,the long-run effect of a tax cut is to ________ real output and ________ the interest rate.

A)increase;increase
B)increase;not change
C)not change;increase
D)not change;decrease

Question 67

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 68

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 69

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 70

In the long-run ISLM model and with everything else held constant,the long-run effect of a contractionary fiscal policy is to ________ real output and ________ the interest rate.

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

Question 71

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 72

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 73

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.

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

Question 74

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

Question 75

In the long-run ISLM model and with everything else held constant,the long-run effect of a cut in government spending is to ________ real output and ________ the interest rate.

A)increase;increase
B)increase;not change
C)not change;increase
D)not change;decrease

Question 76

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary monetary policy is to

A)increase real output and the interest rate.
B)not change either real output or the interest rate.
C)increase real output and leave the interest rate unchanged.
D)increase the interest rate and leave real output unchanged.

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

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 79

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.

Question 80

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.