Deck 21: Monetary and Fiscal Policy in the ISLM Model

Question 1

Everything else held constant,changes in the interest rate affect planned investment spending and hence the equilibrium level of output,but this change in investment spending ________.

A)merely causes a movement along the IS curve and not a shift
B)is crowded out by higher taxes
C)is crowded out by higher government spending
D)is crowded out by lower consumer expenditures

Answer 1

merely causes a movement along the IS curve and not a shift

Question 2

In the Keynesian cross diagram,a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.

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

Answer 2

down; fall

Question 3

Other things equal,a decrease in autonomous consumption shifts the ________ curve to the ________.

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

Answer 3

IS; left

Question 4

A decrease in autonomous planned investment spending,other things equal,shifts the ________ curve to the ________.

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

Question 5

In the Keynesian cross diagram,a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to fall,and the IS curve to shift to the ________,everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 6

In the Keynesian cross diagram,a decline in autonomous consumer expenditure causes the aggregate demand function to shift down,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.

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

Question 7

In the Keynesian cross diagram,an increase in autonomous consumer expenditure causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.

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

Question 8

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.

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

Question 9

A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.

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

Question 10

An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.

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

Question 11

An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.

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

Question 12

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to fall,and the IS curve to shift to the ________,everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 13

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.

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

Question 14

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.

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

Question 15

A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________,everything else held constant.

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

Question 16

In the Keynesian cross diagram,an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.

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

Question 17

A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________,everything else held constant.

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

Question 18

In the Keynesian cross diagram,an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to rise,and the IS curve to shift to the ________,everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 19

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.

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

Question 20

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to rise,and the IS curve to shift to the ________,everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 21

A shift in tastes toward foreign goods ________ net exports in the U.S.and causes the IS curve to shift to the ________ in the U.S.,everything else held constant.

A)decreases; right
B)decreases; left
C)increases; right
D)increases; left

Question 22

If American college students decide that drinking Mexican-brewed beer helps one get noticed,net exports will tend to fall,causing aggregate demand to ________ and the ________ curve to shift to the left,everything else held constant.

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

Question 23

A shift in tastes toward American goods ________ net exports in the U.S.and causes the IS curve to shift to the ________ in the U.S.,everything else held constant.

A)decreases; right
B)decreases; left
C)increases; right
D)increases; left

Question 24

A shift in tastes toward American goods ________ net exports in the U.S.and causes the quantity of aggregate output demanded to ________ in the U.S.,everything else held constant.

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

Question 25

Everything else held constant,a shift in tastes in the U.S.towards American goods will ________ net exports in the U.S.and cause the quantity of aggregate output demanded to ________ in Mexico.

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

Question 26

An appreciation of the U.S.dollar makes foreign goods cheaper relative to American goods,resulting in a ________ in net exports in the U.S.and a ________ shift of the IS curve in the U.S.,everything else held constant.

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

Question 27

A depreciation of the U.S.dollar makes American goods cheaper relative to foreign goods,resulting in a ________ in net exports in the U.S.and a ________ shift of the IS curve in the U.S.,everything else held constant.

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

Question 28

A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________,everything else held constant.

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

Question 29

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 30

Everything else held constant,a shift in tastes in the U.S.toward Mexican goods will ________ net exports in the U.S.and cause the quantity of aggregate output demanded to ________ in Mexico.

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

Question 31

An autonomous appreciation of the U.S.dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S.

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

Question 32

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 33

Which of the following does not shift the IS curve?

A)An increase in autonomous consumption.
B)An increase in government spending.
C)A decline in government spending.
D)A fall in the interest rate.

Question 34

An autonomous depreciation of the U.S.dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S.net exports,everything else held constant.

A)cheaper; decline
B)cheaper; rise
C)more expensive; decline
D)more expensive; rise

Question 35

A shift in tastes toward foreign goods ________ net exports in the U.S.and causes the quantity of aggregate output demanded to ________ in the U.S.,everything else held constant.

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

Question 36

A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.

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

Question 37

If young business professionals in America suddenly decide that driving German-made cars is an important status symbol,net exports will tend to ________ causing aggregate demand to ________,everything else held constant.

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

Question 38

A tax cut ________ disposable income,________ consumption expenditure,and shifts the IS curve to the ________,everything else held constant.

A)increases; increases; right
B)increases; decreases; right
C)decreases; increases; left
D)decreases; decreases; left

Question 39

The IS curve shifts to the left when ________.

A)taxes increase
B)government spending increases
C)the money supply increases
D)autonomous planned investment spending increases

Question 40

A tax increase ________ disposable income,________ consumption expenditure,and shifts the IS curve to the ________,everything else held constant.

A)increases; increases; right
B)increases; decreases; left
C)decreases; increases; left
D)decreases; decreases; left

Question 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

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 63

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 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 73

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 74

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 75

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 76

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 77

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 78

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 79

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 80

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