Deck 13: The Is-Lm-Bp Approach

Question 1

Suppose that North Korea has closed off its capital market from the rest of the world.No resident is allowed to invest outside North Korea and no foreigner is allowed to invest in North Korea's capital market.In this case,the BP curve will be:

A) upward-sloping curve
B) downward-sloping curve
C) horizontal curve
D) vertical curve

Answer 1

vertical curve

Question 2

The IS curve represents the __________,while the LM curve represents the _________.

A) foreign exchange market; money market
B) foreign exchange market; bond market
C) goods and services market; foreign exchange market
D) goods and services market; money market

Answer 2

goods and services market; money market

Question 3

With floating exchange rates,a country can use _______ to alter domestic income.

A) Fiscal policy
B) Monetary policy
C) Currency devaluations
D) Currency appreciation

Answer 3

Monetary policy

Question 4

A change in the riskiness of country's assets shifts the:

A) IS curve
B) LM curve
C) BP curve
D) None of the above

Question 5

When the leakages are ________ the injections,then the value of income received from producing goods and services will equal to total spending.

A) Greater than
B) Less than
C) Equal to
D) The sum of

Question 6

Which of the following factors shifts the LM curve to the left?

A) An increase in money supply
B) An decrease in money supply
C) An increase in government spending
D) A depreciation of domestic currency

Question 7

A change in fiscal policy shifts the:

A) IS curve
B) LM curve
C) BP curve
D) None of the above

Question 8

Typically,the LM curve is:

A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping

Question 9

If the Fed decreases money supply,

A) the IS curve will shift to the right.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the LM curve will shift to the left.

Question 10

Which of the following is not one of the three equilibrium conditions in an IS-LM-BP model?

A) Goods market equilibrium
B) Balance of payments equilibrium
C) Currency equilibrium
D) Money market equilibrium

Question 11

The following curves represent an equilibrium in which markets? Match the curves with the type of equilibrium.
I.Money market equilibrium
II.Balance of payments equilibrium
III.Goods market equilibrium

A) IS, BP, LM
B) LM, BP, IS
C) BP, IS, LM
D) LM, IS, BP

Question 12

Typically,the IS curve is:

A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping

Question 13

Under fixed exchange rates,when a central bank increases money supply,it first shifts the LM curve to the ______ and later shifts ______.

A) left; the LM curve to the right.
B) left; the IS curve to the right.
C) right; the LM curve to the left.
D) right; the IS curve to the right.

Question 14

A change in the monetary policy shifts the:

A) IS curve
B) LM curve
C) BP curve
D) None of the above

Question 15

Use this graph to answer questions 21 and 22.
Figure 13.3:
Using Figure 13.3,if a country experiences less than perfect capital mobility,the BP curve has a shape like:

A) BP_A
B) BP_B
C) BP_C
D) BP_D

Question 16

With flexible exchange rates,a decrease in money supply by a central bank causes the domestic interest rate to _______ ,official settlements _______,and the domestic currency to _______.As a result,the IS curve will shift to bring the domestic interest rate to be equal to foreign interest rates.

A) fall; deficit; depreciate
B) rise; deficit; depreciate
C) rise; surplus; appreciate
D) fall; surplus; appreciate

Question 17

The ________ represents all the points where money supplied is equal to money demanded.

A) IS curve
B) LM curve
C) BP curve
D) None of the above

Question 18

With fixed exchange rates,a country cannot conduct ________ to alter domestic income.

A) Fiscal policy
B) Monetary policy
C) Currency devaluations
D) Currency appreciation

Question 19

Use this graph to answer questions 21 and 22.
Figure 13.3:
Using Figure 13.3,which of the following is correct about the BP_C horizontal curve?

A) It assumes perfect capital mobility.
B) It assumes perfect substitutability between domestic and foreign assets.
C) It represents equilibria in the balance of payment.
D) All of the above are correct.

Question 20

If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _____ in the value of the country's currency,which will tend to _____ national income.

A) a depreciation; increase
B) a depreciation; decrease
C) an appreciation; increase
D) an appreciation; decrease

Question 21

The factor that shifts the BP curve is a change in perception of asset substitutability.

Question 22

Suppose that the government uses an expansionary fiscal policy.Then:

A) The IS curve shifts right
B) The IS curve shifts left
C) The LM curve shifts right
D) The LM curve shifts left

Question 23

When the domestic currency appreciates,the IS curve shifts:

A) to the left, causing domestic interest rate to rise.
B) to the left, causing domestic interest rate to fall.
C) to the right, causing domestic interest rate to rise.
D) to the right, causing domestic interest rate to fall.

Question 24

Suppose the central bank increases the money supply.Then:

A) The IS curve shifts right
B) The IS curve shifts left
C) The LM curve shifts right
D) The LM curve shifts left

Question 25

Using the IS-LM-BP model with the perfect capital mobility assumption to answer this question.Which of the following statements is TRUE?
I.In a floating exchange rate regime,fiscal policy is effective in stimulating income.
II.In a floating exchange rate regime,monetary policy is effective in stimulating income.

A) Only I is true.
B) Only II is true.
C) Both I and II are true
D) Neither I nor II is true.

Question 26

Suppose the central bank pursues restrictive monetary policy.Then:

A) The IS curve shifts right
B) The IS curve shifts left
C) The LM curve shifts right
D) The LM curve shifts left

Question 27

When the Fed decreases money supply,the LM curve shifts:

A) to the left, causing domestic interest rate to rise.
B) to the left, causing domestic interest rate to fall.
C) to the right, causing domestic interest rate to rise.
D) to the right, causing domestic interest rate to fall.

Question 28

Assume perfect capital mobility and floating exchange rates.Then,if the central bank increases money supply,the domestic currency will _______ and cause the IS curve to ________.

A) Appreciate, shift to the right
B) Appreciate, shift to the left
C) Depreciate, shift to the right
D) Depreciate, shift to the left

Question 29

Assume perfect capital mobility and floating exchange rates.If the government runs a budget deficit,the domestic currency will _______ and cause the IS curve to ________.

A) Appreciate, shift to the right
B) Appreciate, shift to the left
C) Depreciate, shift to the right
D) Depreciate, shift to the left

Question 30

The LM curve represents all the points where money supplied is equal to money demanded.

Question 31

In a fixed exchange rate regime,assuming perfect capital mobility,if China increases government spending to stimulate the economy,which of the following would happen in China?

A) Capital account deficit
B) A decrease in money supply
C) Official settlement surplus
D) A decrease in domestic output

Question 32

If the capital is perfectly immobile due to restrictions,then the BP curve is:

A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping

Question 33

With perfect substitutability and perfect capital mobility,the domestic interest rate is equal to the foreign interest rate.

Question 34

Due to the potential for dueling fiscal policies and sharp movements in exchange rates,some countries have pursued:

A) International policy coordination.
B) Protectionist tariffs
C) Isolationism policies
D) World bank trade agreements

Question 35

The internal and external equilibrium occurs when the IS curve crosses the LM curve above the BP curve.

Question 36

An economy starts in an equilibrium condition in three markets under flexible exchange rate regime and perfect capital mobility.If the central bank in a foreign country increases its interest rate,what would happen in the domestic country?

A) domestic currency depreciates and the IS curve shifts to the right.
B) domestic currency appreciates and the IS curve shifts to the left.
C) domestic currency depreciates and the LM curve shifts to the right.
D) domestic currency appreciates and the LM curve shifts to the left.

Question 37

Under an assumption of perfect capital mobility,suppose that international investors perceive the U.S.assets to be riskier than other countries during the Great Recession of 2008-09.The BP curve for the U.S would:

A) have upward slope.
B) have downward slope.
C) shift downward by the distance of risk premium.
D) shift upward by the distance of risk premium.

Question 38

Suppose that the government runs a budget surplus.Then:

A) The IS curve shifts right
B) The IS curve shifts left
C) The LM curve shifts right
D) The LM curve shifts left

Question 39

The balance of payments equilibrium is where the willingness to hold money is equal to the quantity of money supply.

Question 40

Assume perfect capital mobility and fixed exchange rates.If the central bank increases money supply,it must also ________,which will ________.

A) Buy foreign currency, have no effect on the money supply
B) Buy foreign currency, increase the money supply
C) Buy domestic currency, increase the money supply
D) Buy domestic currency, decrease the money supply

Question 41

If,other things being equal,a country with a flexible exchange rate increases its money supply,this will lead to _____ in the value of the country's currency,which will tend to _____ national income.

A) a depreciation; increase
B) a depreciation; decrease
C) an appreciation; increase
D) an appreciation; decrease

Question 42

"The assumptions of perfect substitutability of assets and perfect capital mobility mean that interest rates on domestic assets and comparable foreign assets will be equalized."

Question 43

Figure 13.1
Refer to Figure 13.1.Starting from an equilibrium point A,if the LM curve shifts to the left to LM₂,

A) there will be official settlement deficit which pressures the domestic currency to depreciate.
B) there will be official settlement deficit which pressures the domestic currency to appreciate.
C) there will be official settlement surplus which pressures the domestic currency to depreciate.
D) there will be official settlement surplus which pressures the domestic currency to appreciate.

Question 44

Figure 13.1
Refer to Figure 13.1.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:

A) depreciate, shifting the IS curve to the right.
B) depreciate, shifting the IS curve to the left.
C) appreciate, shifting the IS curve to the left.
D) depreciate, shifting the LM curve to the right.

Question 45

"The BP curve could be vertical,if capital is perfectly mobile."

Question 46

Figure 13.1
Refer to Figure 13.1.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:

A) buy domestic currency, sell foreign currency, and shift the LM to the right.
B) buy foreign currency, sell domestic currency, and shift the LM to the right.
C) buy domestic currency, sell foreign currency, and shift the IS to the left.
D) buy foreign currency, sell domestic currency, and shift the IS to the right.

Question 47

"Under flexible exchange rate system,fiscal policy is ineffective,but monetary policy is effective in changing domestic income."

Question 48

Figure 13.2
Refer to Figure 13.2.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:

A) depreciate, shifting the IS curve to the right.
B) depreciate, shifting the IS curve to the left.
C) appreciate, shifting the IS curve to the right.
D) appreciate, shifting the LM curve to the left.

Question 49

"An expansionary monetary policy shifts the LM curve to the right and causes the domestic interest rate to rise."

Question 50

Figure 13.2
Refer to Figure 13.2.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:

A) buy domestic currency, sell foreign currency, and shift the IS to the left.
B) buy foreign currency, sell domestic currency, and shift the LM to the right.
C) buy domestic currency, sell foreign currency, and shift the LM to the left.
D) buy foreign currency, sell domestic currency, and shift the IS to the right.

Question 51

"The balance of payment equilibrium implies that current account equals to zero."

Question 52

Considering the internal balance in an economy,which of the following could lead to lower interest rate and higher income?

A) An increase in government spending
B) A depreciation of domestic currency
C) An increase in money supply
D) A decrease in money supply

Question 53

Figure 13.2
Refer to Figure 13.2.Starting from an equilibrium point A,if the IS curve shifts to the left to IS₂,

A) there will be official settlement deficit which pressures the domestic currency to depreciate.
B) there will be official settlement deficit which pressures the domestic currency to appreciate.
C) there will be official settlement surplus which pressures the domestic currency to depreciate.
D) there will be official settlement surplus which pressures the domestic currency to appreciate.

Question 54

Figure 13.2
Refer to Figure 13.2.Starting from an equilibrium point A,which of the following factors would cause the IS curve to shift to the left.

A) A tax cut
B) A decrease in money supply
C) An increase in money supply
D) A decrease in government spending