Question 1

The economy tends to be less stable with a __________ LM curve causing interest rates to be rather __________ to shifts in the IS curve.

Accepted Answer

The answer of The economy tends to be less stable...

Question 2

The amount of investment demand at each interest rate suddenly falls. If the Fed holds to an unchanged money supply target, the change in GDP is __________ if it had held to an unchanged interest rate target.

Accepted Answer

If investment demand falls at each interest rate, then there will be a decrease in investment spending, leading to a decrease in aggregate demand. If the Fed holds the money supply constant, then this decrease in investment spending would not be counteracted by a decrease in interest rates, which would have stimulated other components of aggregate demand. Therefore, the decrease in GDP would be less than if the Fed had held to an unchanged interest rate target.

Question 3

The economy tends to be more stable with a __________ LM curve causing interest rates to be rather __________ to shifts in the IS curve.

Accepted Answer

The answer of The economy tends to be more stable...

Question 4

Suppose the IS curve shifts back and forth. With a flat LM curve you get __________ variability in the output and __________ variability in the interest rate than you get with a steep LM curve.

Accepted Answer

If the IS curve is shifting back and forth, it means that there are frequent changes in investment, consumption, and government expenditure. With a flat LM curve, a small change in the IS curve will create a larger change in the interest rate and output because the LM curve is not responding much to these changes. It implies that the output and interest rate will be more volatile in this case. On the other hand, with a steep LM curve, even a large change in the IS curve will not result in a significant change in the interest rate and output. As a result, the output and interest rate will be less volatile. Therefore, the correct answer is B, more variability in the output and less variability in the interest rate than you get with a steep LM curve.

Question 5

The amount of investment demand at each interest rate falls. If the Fed holds to an unchanged interest rate target, the change in GDP is __________ if it had held to an unchanged money supply target.

Accepted Answer

When the Fed holds to an unchanged interest rate target despite a fall in investment demand, it adjusts the money supply to maintain that target. This action can stimulate the economy more than if the Fed had held the money supply constant, leading to a greater change in GDP.

Question 6

Suppose the IS curve shifts back and forth. With a steep LM curve you get __________ variability in the interest rate and __________ variability in output than you get with a flat LM curve.

Accepted Answer

The answer of Suppose the IS curve shifts back and...

Quiz 25: Money and Economic Stability in the ISLM World

The economy tends to be less stable with a LM curve causing interest rates to be rather to shifts in the IS curve.

The amount of investment demand at each interest rate suddenly falls. If the Fed holds to an unchanged money supply target, the change in GDP is __________ if it had held to an unchanged interest rate target.

The economy tends to be more stable with a LM curve causing interest rates to be rather to shifts in the IS curve.

Suppose the IS curve shifts back and forth. With a flat LM curve you get variability in the output and variability in the interest rate than you get with a steep LM curve.

The amount of investment demand at each interest rate falls. If the Fed holds to an unchanged interest rate target, the change in GDP is __________ if it had held to an unchanged money supply target.

Suppose the IS curve shifts back and forth. With a steep LM curve you get variability in the interest rate and variability in output than you get with a flat LM curve.