Question 1

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.

Accepted Answer

An increase in government spending leads to an increase in aggregate demand in the short run, causing the equilibrium level of aggregate output to rise at any given interest rate. This means that the IS curve shifts to the right. The LM curve remains unchanged.

Question 2

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.

Accepted Answer

An increase in autonomous consumer expenditure would cause an increase in consumption and hence an increase in aggregate demand. This would shift the aggregate demand function upwards and increase the equilibrium level of aggregate output. The increase in output would lead to an increase in income, which would in turn lead to an increase in consumption and investment expenditures, causing the IS curve to shift to the right.

Question 3

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.

Accepted Answer

A decrease in investment spending due to pessimism about investment profitability leads to a decrease in aggregate demand, causing the aggregate demand curve to shift down. This results in a lower equilibrium level of aggregate output. Consequently, the IS curve, which represents equilibrium in the goods market, shifts to the left as the overall demand for goods and services decreases.

Question 4

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.

Accepted Answer

An increase in autonomous planned investment spending causes an increase in overall spending, which leads to an increase in the equilibrium level of aggregate output. This, in turn, shifts the IS curve to the right. The LM curve is not affected by changes in autonomous planned investment spending.

Question 5

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.

Accepted Answer

An increase in investment spending will shift the aggregate demand function upward since it will increase aggregate demand at any given price level. This will lead to a rise in equilibrium level of aggregate output as firms would be producing and supplying more goods and services to cater to the increased demand.

Question 6

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.

Accepted Answer

A decrease in investment spending will shift the aggregate demand curve to the left, indicating a decrease in the level of aggregate output or GDP. This is because when companies are less optimistic about their investment profitability, they will invest less, leading to a decrease in production, output, and income in the economy. Therefore, the equilibrium level of aggregate output will fall.

Question 7

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.

Accepted Answer

A decline in autonomous consumer expenditure will lead to a decrease in aggregate demand. Therefore, the equilibrium level of aggregate output will fall. Since the IS curve shows the equilibrium combinations of interest rate and output for different levels of aggregate expenditure, a decrease in autonomous consumer expenditure will shift the IS curve to the left.

Question 8

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.

Accepted Answer

An increase in autonomous consumer expenditure causes a rise in aggregate demand, which in turn increases the equilibrium level of aggregate output. This shift in the IS-LM model causes the IS curve to shift rightward, representing the new equilibrium level of output at a higher interest rate.

Question 9

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.

Accepted Answer

An increase in investment spending will shift the aggregate demand function upward as there will be an increase in demand for goods and services. This will cause the equilibrium level of aggregate output to rise, indicating a rightward shift in the IS curve as firms will need to produce more output to meet the increase in demand for their products.

Question 10

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.

Accepted Answer

A decrease in autonomous consumer expenditure would cause a decrease in aggregate demand, leading to a decrease in equilibrium output. This means that the IS curve would shift to the left. The LM curve would not shift because there is no direct effect on the money market.

Question 11

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.

Accepted Answer

Autonomous consumer expenditure represents a component of aggregate demand that is independent of the level of output. A decline in autonomous consumer expenditure will shift the aggregate demand function downwards. As a result, the equilibrium level of aggregate output will also fall, given that at the initial level of output, overall spending in the economy will be lower than before.

Question 12

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.

Accepted Answer

An increase in investment spending shifts the aggregate demand (AD) curve up, leading to an increase in equilibrium output. This is because the AD curve shows the level of output that firms are willing to produce at a given price level, and increased investment spending means firms are willing to produce more at the same price level. This increase in equilibrium output causes the IS curve to shift to the right, as it shows the combinations of interest rates and output that result in goods and services markets being in equilibrium. This is because when output is higher, more investment is needed to meet the demand, leading to an increase in interest rates.

Question 13

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.

Accepted Answer

A decrease in investment spending will lower aggregate demand, resulting in a decrease in the equilibrium level of aggregate output. This downward shift in aggregate demand will cause the IS curve to shift to the left.

Question 14

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 ________.

Accepted Answer

Changes in the interest rate only cause a movement along the IS curve because investment spending is already included in the calculation of the equilibrium level of output in the IS-LM model. The other options refer to crowding out, which is not relevant to this specific question.

Question 15

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.

Accepted Answer

A decline in autonomous consumer expenditure would decrease consumption expenditures and shift the AD curve downward/leftward. The equilibrium level of aggregate output would fall due to the decrease in aggregate demand. The IS curve would also shift leftward, as the decline in autonomous consumption expenditure would decrease investment demand and reduce the interest rate needed to equate saving and investment in the goods market.

Question 16

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.

Accepted Answer

An increase in autonomous consumer expenditure will increase consumption expenditure, which is a component of aggregate demand. Therefore, it will cause the aggregate demand function to shift up. The increase in aggregate demand will result in an increase in the equilibrium level of aggregate output, everything else held constant.

Question 17

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.

Accepted Answer

A decline in autonomous planned investment spending would cause a leftward shift in the IS (investment-saving) curve, as there is less aggregate demand for goods and services at every interest rate. This shift would cause the equilibrium level of aggregate output to fall. It would not affect the LM (liquidity preference-money supply) curve, as there is no change in the money market.

Question 18

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.

Accepted Answer

According to the Keynesian Cross model, an increase in autonomous consumer expenditure will shift the consumption function upward, leading to a higher level of equilibrium output. This is represented by a rightward shift of the IS curve. The LM curve represents the combinations of interest rates and output levels at which the money market is in equilibrium, so it is not directly affected by changes in consumer expenditure.

Question 19

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

Accepted Answer

Autonomous planned investment spending is a component of aggregate demand in the IS-LM model. A decrease in autonomous planned investment spending leads to a decrease in aggregate demand, which shifts the IS curve to the left. The LM curve is not affected by changes in autonomous planned investment spending.

Question 20

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.

Accepted Answer

According to the Keynesian model, a reduction in government spending would shift the IS curve to the left, causing a decrease in equilibrium aggregate output at any given interest rate. This is because government spending is a component of aggregate demand, and a reduction in government spending would lead to a decrease in overall demand in the economy. The LM curve remains unchanged in this scenario as there is no direct impact on the money market.

Quiz 21: The Is Curve

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.

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

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 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 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.

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.

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 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.

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.

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 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.

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 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.

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

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

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.