Question 1

From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the new IS-LM equilibrium we have some combination of a ________ income and a ________ interest rate.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower

Accepted Answer

If the money supply falls, the LM curve shifts upwards to the left. This leads to a higher interest rate and lower income at the new equilibrium point. Therefore, the correct choice is C, lower income and higher interest rate.

Question 2

Moving upward along an LM curve, velocity ________ because ________ remains constant while ________ rises.
A) rises, real balances, real income
B) rises, the interest rate, the price level
C) rises, the interest rate, real balances
D) falls, real balances, real income
E) falls, real income, real balances

Accepted Answer

The LM curve represents the relationship between liquidity preference and money supply in an economy, holding the interest rate constant. Moving up along the LM curve implies an increase in income, which increases the demand for money. Since the money supply remains constant, the velocity of money (how quickly money circulates in the economy) must rise to accommodate the higher demand for transactions. This happens because real income rises, increasing transactions demand for money, while real balances (the real value of the money supply) remain constant.

Question 3

On a diagram with "calories consumed per day" on the horizontal axis and "exercise per day" on the vertical axis, we can draw a line along which your body weight at this moment will remain constant. This line is analogous to how ________ for changing values of the variables on the two axes.
A) the IS curve holds income constant
B) the IS curve holds the demand for money constant
C) the LM curve holds the demand for money constant
D) the LM curve holds income constant

Accepted Answer

The LM curve represents combinations of interest rates and levels of real income for which the demand for money equals the supply of money, holding the demand for money constant as income and interest rates change. This is analogous to the line on the diagram where body weight remains constant for different values of calories consumed and exercise per day, as it also represents a balance (in this case, between calories consumed and burned).

Question 4

With normally-sloped IS and LM curves, an increase in government spending ________ the interest rate, which ________ autonomous planned expenditure, resulting in a final increase in income ________ than what the government spending increase would have produced in the Chapter 3 model.
A) lowers, raises, greater
B) lowers, lowers, greater
C) raises, lowers, less
D) raises, raises, less
E) raises, raises, greater

Accepted Answer

The answer of With normally-sloped IS and LM curves, an...

Question 5

The "velocity" of money is
A) the ratio of real GDP to the real money supply.
B) the real money supply divided by the real GDP.
C) the money supply divided by the price level.
D) the money supply multiplied by the price level.

Accepted Answer

Velocity of money is defined as the rate at which money circulates or changes hands in the economy, and is calculated as the ratio of nominal gross domestic product (GDP) to the money supply. Therefore, option A is the correct choice, as it represents the ratio of real GDP (adjusted for inflation) to the real money supply.

Question 6

Suppose the demand for money becomes less sensitive to changes in the interest rate. In moving along an LM curve, an increase in income must be accompanied by a ________ change in the interest rate than before, meaning that the LM curve has become ________.
A) greater, steeper
B) greater, flatter
C) smaller, steeper
D) smaller, flatter

Accepted Answer

When the demand for money becomes less sensitive to changes in the interest rate, an increase in income must be accompanied by a greater change in the interest rate to maintain money market equilibrium, making the LM curve steeper.

Question 7

The Chapter 3 multiplier, because it assumes an ________ interest rate, is usually an ________ of the fiscal policy multiplier in the IS-LM model.
A) endogenous, underestimate
B) endogenous, overestimate
C) exogenous, underestimate
D) exogenous, overestimate

Accepted Answer

The answer of The Chapter 3 multiplier, because it assumes...

Question 8

A lower nominal money supply is equally demanded, given each interest rate, at a ________ level of income, meaning that the LM curve has shifted to the ________.
A) higher, left
B) higher, right
C) lower, left
D) lower, right

Accepted Answer

A lower nominal money supply reduces the supply of money and leads to a higher interest rate, which in turn reduces output and income. Therefore, at the same interest rate, people demand a lower nominal money supply. This leads to a shift in the LM curve to the left, indicating that at any given interest rate, there is a lower level of income.

Question 9

Figure 4-5 
-In the figure above, people would be trying to increase their holdings of money at
A) points A and E.
B) points B, E, and C.
C) point A.
D) points A and B.
E) point D.

Accepted Answer

The answer of Figure 4-5 
-In the figure above, people...

Question 10

Suppose we have normally-sloped IS and LM curves intersecting at point A. Then a monetary policy change shifts the LM curve to the right. Directly below point A we find a point on the new LM curve that shows us
A) where the new IS-LM equilibrium occurs.
B) how much the interest rate must fall to raise planned expenditures to the new equilibrium income.
C) how much the interest rate must fall to by itself raise the demand for money by as much as the money supply has decreased.
D) how much income must rise to by itself raise the demand for money by as much as the money supply has increased.
E) how much the interest rate must fall to by itself lower the demand for money by as much as the money supply has decreased.

Accepted Answer

The answer of Suppose we have normally-sloped IS and LM...

Question 11

In the IS-LM diagram, we are in "general equilibrium"
A) at all points.
B) at all points on the LM curve.
C) at all points on the IS curve.
D) only at the intersection of the IS and LM curves.

Accepted Answer

General equilibrium occurs when the goods market and money market are both in equilibrium. The IS curve represents the goods market and the LM curve represents the money market. Therefore, we can say that we are in general equilibrium only at the intersection of the IS and LM curves (i.e. when both markets are in equilibrium).

Question 12

A higher nominal money supply is equally demanded, given each level of income, at a ________ interest rate, meaning that the LM curve has shifted to the ________.
A) higher, left
B) higher, right
C) lower, left
D) lower, right

Accepted Answer

The answer of A higher nominal money supply is equally...

Question 13

Figure 4-5 
-In the figure above, at what income would the interest rate that brings about money market equilibrium cause unwanted inventories of commodities to accumulate?
A) YA
B) YB
C) YE
D) YC

Accepted Answer

At income level YC, the interest rate is too high, leading to reduced investment and consumption, causing aggregate demand to fall short of aggregate supply, resulting in unwanted inventories.

Question 14

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending takes us to a new equilibrium with ________ income and ________ interest rate.
A) higher, a higher
B) higher, a lower
C) an unchanged, a higher
D) an unchanged, a lower
E) lower, an unchanged

Accepted Answer

An increase in government spending shifts the IS curve to the right, leading to a new equilibrium with higher income and a higher interest rate due to the upward pressure on interest rates from increased demand for funds.

Question 15

From any point below the current LM curve, money market equilibrium can be restored by some combination of a ________ income and a ________ interest rate that ________ the demand for money.
A) higher, higher, increases
B) higher, lower, increases
C) higher, lower, reduces
D) lower, higher, increases
E) lower, higher, reduces

Accepted Answer

The answer of From any point below the current LM...

Question 16

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending shifts the ________ by a horizontal distance equal to the change in government spending ________.
A) IS curve to the right, divided by the Chapter 3 multiplier
B) IS curve to the right, times the Chapter 3 multiplier
C) IS curve to the left, times the interest rate at the initial equilibrium
D) LM curve to the right, divided by the Chapter 3 multiplier
E) LM curve to the right, divided by the interest rate at the initial equilibrium

Accepted Answer

An increase in government spending shifts the IS curve to the right, and the horizontal distance of this shift is equal to the change in government spending multiplied by the Chapter 3 multiplier. This is because the increase in government spending increases output and income, leading to an increase in the demand for money and a rise in interest rates. The rise in interest rates, in turn, reduces investment and net exports, which partially offsets the initial increase in government spending. The Chapter 3 multiplier captures this offsetting effect and measures the total increase in equilibrium output for a given increase in government spending.

Question 17

Figure 4-5 
-In the figure above, suppose that real income is YB and the money market is in equilibrium. The interest rate at this point is ________ to support commodity market equilibrium, so that involuntary inventory changes are ________.
A) too low, positive
B) too low, negative
C) just right, zero
D) too high, positive
E) too high, negative

Accepted Answer

The answer of Figure 4-5 
-In the figure above, suppose...

Question 18

When the demand for money becomes less responsive to changes in income, the LM curve becomes ________ and it also shifts to the ________.
A) flatter, left
B) flatter, right
C) steeper, left
D) steeper, right

Accepted Answer

The answer of When the demand for money becomes less...

Question 19

Figure 4-5 
-In the figure above, the money market is in equilibrium
A) at points B, C, and E.
B) at points A and E.
C) only at point E.
D) at points E and D.
E) at points A, B, E, and C.

Accepted Answer

The answer of Figure 4-5 
-In the figure above, the...

Question 20

Figure 4-5 
-In the figure above, at what point do we find the commodity market in equilibrium while the money market is not?
A) A
B) B
C) C
D) D
E) E

Accepted Answer

The answer of Figure 4-5 
-In the figure above, at...

Quiz 4: Monetary and Fiscal Policy in the Is-Lm Model

From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the new IS-LM equilibrium we have some combination of a income and a interest rate.

Moving upward along an LM curve, velocity because remains constant while rises.

On a diagram with "calories consumed per day" on the horizontal axis and "exercise per day" on the vertical axis, we can draw a line along which your body weight at this moment will remain constant. This line is analogous to how ________ for changing values of the variables on the two axes.

With normally-sloped IS and LM curves, an increase in government spending the interest rate, which autonomous planned expenditure, resulting in a final increase in income than what the government spending increase would have produced in the Chapter 3 model.

The "velocity" of money is

Suppose the demand for money becomes less sensitive to changes in the interest rate. In moving along an LM curve, an increase in income must be accompanied by a change in the interest rate than before, meaning that the LM curve has become .

The Chapter 3 multiplier, because it assumes an interest rate, is usually an of the fiscal policy multiplier in the IS-LM model.

A lower nominal money supply is equally demanded, given each interest rate, at a level of income, meaning that the LM curve has shifted to the .

Figure 4-5 -In the figure above, people would be trying to increase their holdings of money at

Suppose we have normally-sloped IS and LM curves intersecting at point A. Then a monetary policy change shifts the LM curve to the right. Directly below point A we find a point on the new LM curve that shows us

In the IS-LM diagram, we are in "general equilibrium"

A higher nominal money supply is equally demanded, given each level of income, at a interest rate, meaning that the LM curve has shifted to the .

Figure 4-5 -In the figure above, at what income would the interest rate that brings about money market equilibrium cause unwanted inventories of commodities to accumulate?

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending takes us to a new equilibrium with income and interest rate.

From any point below the current LM curve, money market equilibrium can be restored by some combination of a income and a interest rate that the demand for money.

Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending shifts the by a horizontal distance equal to the change in government spending .

Figure 4-5 -In the figure above, suppose that real income is YB and the money market is in equilibrium. The interest rate at this point is to support commodity market equilibrium, so that involuntary inventory changes are .

When the demand for money becomes less responsive to changes in income, the LM curve becomes and it also shifts to the .

Figure 4-5 -In the figure above, the money market is in equilibrium

Figure 4-5 -In the figure above, at what point do we find the commodity market in equilibrium while the money market is not?

Quiz 4: Monetary and Fiscal Policy in the Is-Lm Model

From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the new IS-LM equilibrium we have some combination of a ________ income and a ________ interest rate.

Moving upward along an LM curve, velocity ________ because ________ remains constant while ________ rises.

On a diagram with "calories consumed per day" on the horizontal axis and "exercise per day" on the vertical axis, we can draw a line along which your body weight at this moment will remain constant. This line is analogous to how ________ for changing values of the variables on the two axes.

With normally-sloped IS and LM curves, an increase in government spending ________ the interest rate, which ________ autonomous planned expenditure, resulting in a final increase in income ________ than what the government spending increase would have produced in the Chapter 3 model.

The "velocity" of money is

Suppose the demand for money becomes less sensitive to changes in the interest rate. In moving along an LM curve, an increase in income must be accompanied by a ________ change in the interest rate than before, meaning that the LM curve has become ________.

The Chapter 3 multiplier, because it assumes an ________ interest rate, is usually an ________ of the fiscal policy multiplier in the IS-LM model.

A lower nominal money supply is equally demanded, given each interest rate, at a ________ level of income, meaning that the LM curve has shifted to the ________.