Question 1

If the LM curve were vertical, then an increase in government spending or a reduction in taxes would

Accepted Answer

When the LM curve is vertical, it implies that the money market is insensitive to changes in interest rates, meaning the demand for money is perfectly inelastic with respect to interest rates. In this scenario, an increase in government spending or a reduction in taxes would lead to higher interest rates as the government competes for a fixed supply of loanable funds. The higher interest rates would crowd out private investment, negating the stimulative effects of the fiscal policy on GDP.

Question 2

If people were suddenly to begin to save a larger proportion of their after-tax income, we should expect to see

Accepted Answer

The answer of If people were suddenly to begin to...

Question 3

The LM curve is really an algebraic or graphic representation of all the combinations of interest rates and GDP that support

Accepted Answer

The LM curve represents all combinations of interest rates and levels of real GDP at which the money market is in equilibrium, meaning where the supply and demand for money are equal.

Question 4

Suppose that the goal of policy were to increase GDP without putting upward pressure on interest rates. If the IS-LM construction displayed the usual slopes, then an appropriate mix of policies would be

Accepted Answer

An increase in government spending and a reduction in taxes would shift the IS curve to the right, increasing GDP. An increase in the supply of money would shift the LM curve to the right, preventing interest rates from rising. This combination of fiscal and monetary policies would achieve the goal of increasing GDP without putting upward pressure on interest rates.

Question 5

Suppose that net exports were to become more sensitive to changes in the interest rate. You would reflect this change by drawing

Accepted Answer

If net exports become more sensitive to changes in the interest rate, the IS curve becomes flatter. This is because a change in the interest rate will have a larger effect on net exports, and thus on aggregate demand, causing a larger shift in the equilibrium output for a given change in the interest rate.

Question 6

It has been argued by some that, "An increase in defense spending will cause GDP to fall because the resulting higher interest rates will depress investment." What is wrong with that argument?

Accepted Answer

Higher interest rates may indeed depress investment, but this is typically a result of increased aggregate demand, which includes government spending on defense. When the government increases its defense spending, it contributes to aggregate demand, which can lead to higher GDP. The argument incorrectly assumes that higher interest rates, which might result from increased borrowing to finance defense spending, would directly lead to a fall in GDP. However, the initial effect of increased defense spending is to raise aggregate demand and thus GDP, even if higher interest rates later potentially dampen investment.

Question 7

IS-LM analysis represents

Accepted Answer

In the IS-LM model, the IS curve represents the relationship between interest rates and the equilibrium level of income in the goods market, shifting due to fiscal policy changes (like changes in government spending or taxes). The LM curve represents the relationship between interest rates and the equilibrium level of income in the money market, shifting due to monetary policy changes (like changes in the money supply). Therefore, monetary policy is represented by shifts in the LM curve, and fiscal policy by shifts in the IS curve.

Question 8

Every point of intersection between an IS schedule and an LM curve can be characterized as specifying

Accepted Answer

Each statement accurately describes a characteristic of the intersection between an IS schedule and an LM curve. A) relates to macroeconomic theory where the intersection can represent a point on the aggregate demand curve at a given price level. B) describes the equilibrium in the money market where money demand equals money supply. C) refers to the goods market equilibrium where consumption, investment, and government fiscal policy align with the income identity. D) summarizes that both the goods and money markets are in equilibrium at this intersection.

Question 9

The slope of an LM curve

Accepted Answer

The LM curve represents the relationship between the liquidity preference (demand for money) and the money supply in an economy, with respect to interest rates and GDP. The slope of the LM curve is influenced by how responsive the demand for money is to changes in GDP and interest rates. If the demand for money is more responsive to changes in GDP, the curve gets steeper (A). If the demand for money is more responsive to changes in the interest rate, the curve gets flatter (B). The slope of the LM curve is generally considered invariant to small changes in the price level (C) and to policy shifts in the supply of money, unless those shifts affect the sensitivity of the demand for money to changes in GDP or interest rates (D). Therefore, all of the statements A, B, C, and D correctly describe factors influencing the slope of the LM curve.

Question 10

The IS curve is, in part,

Accepted Answer

The answer of The IS curve is, in part,
...

Question 11

In the IS-LM model, changes in government purchases lead to larger changes in GDP if

Accepted Answer

A flatter IS curve, due to a larger marginal propensity to consume, implies that a given change in interest rates leads to a larger change in GDP. This means that fiscal policy (changes in government purchases) has a stronger effect on GDP.

Question 12

Consider a $10 billion increase in government spending and investment. The IS curve

Accepted Answer

Each statement describes a way in which an increase in government spending and investment can affect the IS curve: A) reflects the basic idea of a stimulus shifting the curve rightward; B) incorporates the multiplier effect, which amplifies the initial stimulus; C) suggests a parallel shift unless investment's sensitivity to interest rates changes; D) indicates that a change in investment sensitivity to interest rates would affect the curve's slope. Thus, all these statements are correct in the context of how fiscal policy impacts the IS curve.

Question 13

An increase in the price level causes

Accepted Answer

An increase in the price level reduces the real money supply, leading to higher interest rates to equilibrate the money market, which is represented by a leftward shift of the LM curve in the IS-LM model.

Question 14

Which of the following statements is part of an accurate explanation of how an increase in the value of the dollar could lead to a reduction in GDP in the United States?

Accepted Answer

The answer of Which of the following statements is part...

Question 15

In the IS-LM model, changes in government purchases lead to larger changes in GDP if

Accepted Answer

The answer of In the IS-LM model, changes in government...

Question 16

In the IS-LM model, GDP becomes more sensitive to changes in the supply of money if

Accepted Answer

When the marginal propensity to import decreases, the multiplier effect on GDP is stronger, making GDP more sensitive to changes in the money supply.

Question 17

Which of the following would be included in the computation of the money supply?

Accepted Answer

Cash held in a child's piggy bank is considered part of the money supply as it is currency in circulation.

Question 18

With a positively sloped LM curve, the increase in GDP resulting from an increase in government spending

Accepted Answer

With a positively sloped LM curve, an increase in government spending typically leads to higher interest rates as the demand for money increases. This increase in interest rates can dampen investment spending, thus reducing the overall impact of the government spending multiplier.

Question 19

If both investment and net exports are totally insensitive to changes in the interest rate, then

Accepted Answer

The IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium. If investment and net exports are totally insensitive to changes in the interest rate, it means that changes in the interest rate do not affect the equilibrium level of income in the goods market. Therefore, the IS curve is vertical, indicating that the level of income that equilibrates the goods market is the same regardless of the interest rate.

Question 20

Suppose you were given an equilibrium interest rate and a price level consistent with the equality of supply and demand in both the money market and the aggregate goods and services market. You could then

Accepted Answer

The IS-LM model represents equilibrium in the goods and services market (IS curve) and the money market (LM curve). Given an equilibrium interest rate, you can find the corresponding level of GDP (Y*) by substituting this interest rate into either the IS or LM curve, as both curves intersect at the equilibrium point for both interest rate and GDP.

Quiz 8: Financial Markets and Aggregate Demand

If the LM curve were vertical, then an increase in government spending or a reduction in taxes would

If people were suddenly to begin to save a larger proportion of their after-tax income, we should expect to see

The LM curve is really an algebraic or graphic representation of all the combinations of interest rates and GDP that support

Suppose that the goal of policy were to increase GDP without putting upward pressure on interest rates. If the IS-LM construction displayed the usual slopes, then an appropriate mix of policies would be

Suppose that net exports were to become more sensitive to changes in the interest rate. You would reflect this change by drawing

It has been argued by some that, "An increase in defense spending will cause GDP to fall because the resulting higher interest rates will depress investment." What is wrong with that argument?

IS-LM analysis represents

Every point of intersection between an IS schedule and an LM curve can be characterized as specifying

The slope of an LM curve

The IS curve is, in part,

In the IS-LM model, changes in government purchases lead to larger changes in GDP if

Consider a $10 billion increase in government spending and investment. The IS curve

An increase in the price level causes

Which of the following statements is part of an accurate explanation of how an increase in the value of the dollar could lead to a reduction in GDP in the United States?

In the IS-LM model, changes in government purchases lead to larger changes in GDP if

In the IS-LM model, GDP becomes more sensitive to changes in the supply of money if

Which of the following would be included in the computation of the money supply?

With a positively sloped LM curve, the increase in GDP resulting from an increase in government spending

If both investment and net exports are totally insensitive to changes in the interest rate, then

Suppose you were given an equilibrium interest rate and a price level consistent with the equality of supply and demand in both the money market and the aggregate goods and services market. You could then