Deck 5: Goods and Financial Marketsthe Is-Lm Model

Question 1

Suppose policy makers decide to reduce taxes.This fiscal policy action will cause which of the following to occur?

A)the LM curve shifts and the economy moves along the IS curve.
B)the IS curve shifts and the economy moves along the LM curve.
C)both the IS and LM curves shift.
D)neither the IS nor the LM curve shifts.
E)output will change causing a change in money demand and a shift of the LM curve.

Answer 1

B

Question 2

Suppose there is an increase in consumer confidence.Which of the following represents the complete list of variables that must increase in response to this increase in consumer confidence?

A)consumption
B)consumption and investment
C)consumption,investment and output
D)consumption and output
E)consumption,output and the interest rate

Answer 2

E

Question 3

Suppose there is a fiscal contraction.Which of the following is a complete list of the variables that must decrease?

A)consumption
B)consumption and investment
C)consumption and output
D)consumption,output and the interest rate
E)consumption,output and investment

Answer 3

C

Question 4

Which of the following is the definition for the real supply of money?

A)the stock of money measured in terms of goods,not dollars.
B)the stock of high powered money only.
C)the real value of currency in circulation only.
D)the actual quantity of money,rather than the officially reported quantity.
E)the ratio of the real GDP to the nominal money supply.

Question 5

During 2008 in the United States,consumer confidence fell significantly.Which of the following will occur as a result of this reduction in consumer confidence?

A)the LM curve will shift up.
B)the LM curve will shift down.
C)the IS curve will shift rightward.
D)the IS curve will shift leftward.
E)the IS curve will shift rightward,and the LM curve will shift up.

Question 6

Suppose investment spending is NOT very sensitive to the interest rate.Given this information,we know that

A)the IS curve should be relatively flat.
B)the IS curve should be relatively steep.
C)the LM curve should be relatively flat.
D)the LM curve should be relatively steep.
E)neither the IS nor the LM curve will be affected.

Question 7

Suppose the economy is operating on the LM curve but not on the IS curve.Given this information,we know that

A)the goods market is in equilibrium and the money market is not in equilibrium.
B)the money market and bond markets are in equilibrium and the goods market is not in equilibrium.
C)the money market and goods market are in equilibrium and the bond market is not in equilibrium.
D)the money,bond and goods markets are all in equilibrium.
E)neither the money,bond,nor goods markets are in equilibrium.

Question 8

Suppose the demand for money is NOT very sensitive to the interest rate.Given this information,we know that

A)the IS curve should be relatively flat.
B)the IS curve should be relatively steep.
C)the LM curve should be relatively flat.
D)the LM curve should be relatively steep.
E)neither the IS nor the LM curve will be affected.

Question 9

Which of the following occurs as the economy moves leftward along a given IS curve?

A)an increase in the interest rate causes investment spending to decrease
B)an increase in the interest rate causes money demand to increase
C)an increase in the interest rate causes a reduction in the money supply
D)a reduction in government spending causes a reduction in demand for goods
E)an increase in taxes causes a reduction in demand for goods

Question 10

Suppose the economy is currently operating on both the LM curve and the IS curve.Which of the following is true for this economy?

A)Production equals demand.
B)The quantity supplied of bonds equals the quantity demanded of bonds.
C)The money supply equals money demand.
D)Financial markets are in equilibrium.
E)all of the above

Question 11

In late 2007 and early 2008,the U.S.Federal Reserve pursued expansionary monetary policy.Which of the following will occur as a result of this monetary policy action?

A)the LM curve shifts down.
B)the LM curve shifts up.
C)the IS curve shifts rightward as the interest rate falls.
D)the IS curve shifts leftward as the interest rate increases.
E)none of the above

Question 12

For this question,assume that investment spending depends only on the interest rate and no longer depends on output.Given this information,a reduction in government spending

A)will cause investment to decrease.
B)will cause investment to increase.
C)may cause investment to increase or to decrease.
D)will have no effect on output.
E)will cause a reduction in output and have no effect on the interest rate.

Question 13

The LM curve shifts down (or,equivalently,to the right)when which of the following occurs?

A)an increase in taxes
B)an increase in output
C)an open market sale of bonds by the central bank
D)an increase in consumer confidence
E)none of the above

Question 14

Which of the following statements is consistent with a given (i.e.,fixed)LM curve?

A)a reduction in the interest rate causes investment spending to increase
B)a reduction in the interest rate causes money demand to decrease
C)a reduction in the interest rate causes an increase in the money supply
D)an increase in output causes an increase in demand for goods
E)an increase in output causes an increase in money demand

Question 15

The IS curve will shift to the right when which of the following occurs?

A)an increase in the money supply
B)an increase in government spending
C)a reduction in the interest rate
D)all of the above
E)none of the above

Question 16

Suppose the current level of output and the interest rate are such that the economy is operating on neither the IS nor LM curve.Which of the following is true for this economy?

A)production does not equal demand.
B)the money supply does not equal money demand.
C)the quantity supplied of bonds does not equal the quantity demanded of bonds.
D)financial markets are not in equilibrium.
E)all of the above

Question 17

For each interest rate,the LM curve illustrates the level of output where

A)the goods market is in equilibrium.
B)inventory investment equals zero.
C)money supply equals money demand.
D)all of the above
E)none of the above

Question 18

An increase in the money supply will cause an increase in which of the following variables?

A)output
B)investment
C)consumption
D)all of the above
E)none of the above

Question 19

The IS curve represents

A)the single level of output where the goods market is in equilibrium.
B)the single level of output where financial markets are in equilibrium.
C)the combinations of output and the interest rate where the money market is in equilibrium.
D)the combinations of output and the interest rate where the goods market is in equilibrium.
E)none of the above

Question 20

Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit.Based on the IS-LM model,we know with certainty that the following will occur as a result of this fiscal policy action.

A)investment spending will decrease.
B)investment spending will increase.
C)there will be no change in investment spending.
D)investment spending may increase,decrease,or not change.
E)none of the above

Question 21

We know with certainty that a tax increase must cause which of the following?

A)an increase in investment
B)a reduction in investment
C)no change in investment
D)none of the above

Question 22

An increase in consumer confidence will tend to cause which of the following to occur?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 23

A Fed purchase of securities will most likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 24

A fiscal contraction will tend to cause which of the following to occur?

A)a reduction in the interest rate and a reduction in investment
B)a reduction in the interest rate and an upward shift in the LM curve
C)a reduction in the interest rate and an ambiguous effect on investment
D)no change in output if the Fed simultaneously pursues contractionary monetary policy

Question 25

Suppose there is a simultaneous central bank purchase of bonds and increase in taxes.We know with certainty that this combination of policies must cause

A)an increase in the interest rate (i).
B)a reduction in i.
C)an increase in output (Y).
D)a reduction in Y.

Question 26

Under the reasonable dynamic assumptions discussed in the text,a monetary contraction should result in

A)an immediate rise in the interest rate,and no further interest rate changes.
B)an immediate rise in the interest rate,and then a fall in the interest rate over time.
C)an immediate rise in the interest rate,and then a further rise over time.
D)a very gradual but steady rise in the interest rate to its new equilibrium level.
E)no change in the interest rate initially,and then a sudden rise to its new equilibrium value.

Question 27

For this question,assume that investment spending depends only on output and no longer depends on the interest rate.Given this information,an increase in the money supply

A)will cause investment to decrease.
B)will cause investment to increase.
C)will cause a reduction in the interest rate.
D)will have no effect on output or the interest rate.
E)will cause an increase in output and have no effect on the interest rate.

Question 28

Assume that investment does NOT depend on the interest rate.A reduction in government spending will cause which of the following for this economy?

A)no change in the interest rate
B)no change in output
C)no change in investment
D)an increase in investment
E)none of the above

Question 29

Suppose there is a simultaneous fiscal expansion and monetary expansion.We know with certainty that

A)output will increase.
B)output will decrease.
C)the interest rate will increase.
D)the interest rate will decrease.
E)both output and the interest rate will increase.

Question 30

For this question,assume that investment spending depends only on output and no longer depends on the interest rate.Given this information,an increase in government spending

A)will cause investment to decrease.
B)will cause investment to increase.
C)may cause investment to increase or to decrease.
D)will have no effect on output.
E)will cause an increase in output and have no effect on the interest rate.

Question 31

A reduction in consumer confidence will likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 32

Suppose there is a Fed purchase of bonds and simultaneous tax cut.We know with certainty that this combination of policies must cause

A)an increase in the interest rate (i).
B)a reduction in i.
C)an increase in output (Y).
D)a reduction in Y.

Question 33

Suppose there is a simultaneous central bank sale of bonds and tax increase.We know with certainty that this combination of policies must cause

A)an increase in the interest rate (i).
B)a reduction in i.
C)an increase in output (Y).
D)a reduction in Y.

Question 34

A reasonable dynamic assumption for the IS-LM model is that

A)the economy is always on both the IS and LM curves.
B)the economy is always on the IS curve,but moves only slowly to the LM curve.
C)the economy is always on the LM curve,but moves only slowly to the IS curve.
D)the money market is quick to adjust,but the bond market adjusts more slowly.
E)adjustment to the new IS-LM equilibrium is instantaneous after an LM shift,but not after an IS shift.

Question 35

An increase in the money supply must cause which of the following?

A)a leftward shift in the IS curve
B)a reduction in the interest rate and ambiguous effects on investment
C)an increase in investment and a rightward shift in the IS curve
D)no change in the interest rate if investment is independent of the interest rate
E)no change in output if investment is independent of the interest rate

Question 36

An increase in the reserve deposit ratio,θ,will most likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 37

Suppose there is a simultaneous fiscal expansion and monetary contraction.We know with certainty that

A)output will increase.
B)output will decrease.
C)the interest rate will increase.
D)the interest rate will decrease.
E)both output and the interest rate will increase.

Question 38

Suppose there is a simultaneous Fed sale of bonds and increase in consumer confidence.We know with certainty that these two simultaneous events will cause

A)an increase in the interest rate (i).
B)a reduction in i.
C)an increase in output (Y).
D)a reduction in Y.

Question 39

Assume that investment does NOT depend on the interest rate.A reduction in the money supply will cause which of the following for this economy?

A)no change in the interest rate
B)no change in output
C)a reduction in investment
D)an increase in investment

Question 40

For this question,assume that investment spending depends only on the interest rate and no longer depends on output.Given this information,a reduction in the money supply

A)will cause investment to decrease.
B)will cause investment to increase.
C)may cause investment to increase or to decrease.
D)will have no effect on output.
E)will cause a reduction in output and have no effect on the interest rate.

Question 41

Based on our understanding of the IS-LM model that takes into account dynamics,we know that an increase in government spending will cause

A)a gradual increase in i and gradual increase in Y.
B)an immediate increase in Y and immediate drop in i.
C)an immediate increase in i and no initial change in Y.
D)a gradual increase in i and an immediate increase in Y.

Question 42

Which of the following best defines the IS curve?

A)the combinations of i and Y that maintain equilibrium in the goods market
B)illustrates the effects of changes in i on investment
C)illustrates the effects of changes in i on desired money holdings by individuals
D)the combinations of i and Y that maintain equilibrium in financial markets

Question 43

Which of the following triggered the U.S.recession of 2001?

A)decline in investment demand
B)decline in consumption demand
C)increase in budget deficit
D)increase in trade deficit

Question 44

A fiscal expansion (e.g.a tax cut)will result in an increase in income,an increase in money demand,and an increase in the equilibrium interest rate in financial markets.Explain what happens to the position of the LM curve as policy makers pursue expansionary fiscal policy.

Question 45

The IS curve will shift to the left when which of the following occurs?

A)a reduction in the money supply
B)a reduction in government spending
C)an increase in the interest rate
D)all of the above
E)none of the above

Question 46

If government spending and taxes decrease by the same amount,

A)the IS curve does not shift.
B)the IS curve shift leftward.
C)the IS curve shifts rightward.
D)the LM curve shifts downward.

Question 47

Which of the following best defines the LM curve?

A)the combinations of i and Y that maintain equilibrium in the goods market
B)illustrates the effects of changes in i on investment
C)illustrates the effects of changes in i on desired money holdings by individuals
D)the combinations of i and Y that maintain equilibrium in financial markets

Question 48

An increase in government spending will likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 49

Explain the determinants of investment.Include in your answer an explanation of how a change in each determinant affects investment.

Question 50

Based on our understanding of the IS-LM model that takes into account dynamics,we know that a reduction in government spending will cause

A)an immediate drop in Y and immediate increase in i.
B)an immediate reduction in i and no initial change in Y.
C)a gradual reduction in i and gradual reduction in Y.
D)a gradual reduction in i and an immediate reduction in Y.

Question 51

A reduction in the reserve deposit ratio,θ,will most likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 52

When the central bank pursues contractionary monetary policy,we that this policy will result in an increase in the interest rate,a reduction in investment,a reduction in demand,and a lower level of equilibrium output.Explain what happens to the position of the IS curve as the central bank pursues contractionary monetary policy.

Question 53

Based on our understanding of the IS-LM model that takes into account dynamics,we know that a reduction in the money supply will cause

A)an immediate drop in Y and immediate increase in i.
B)an immediate increase in i and no initial change in Y.
C)a gradual increase in i and gradual reduction in Y.
D)none of the above

Question 54

Based on our understanding of the IS-LM model that takes into account dynamics,we know that an increase in the money supply will cause

A)an immediate increase in i and no initial change in Y.
B)an immediate decrease in i and no initial change in Y.
C)a gradual decrease in i and gradual increase in Y.
D)none of the above

Question 55

Which of the following occurs as the economy moves rightward along a given IS curve?

A)a reduction in the interest rate causes investment spending to decrease.
B)a reduction in the interest rate causes money demand to increase.
C)a reduction in the interest rate causes a reduction in the money supply.
D)an increase in government spending causes a reduction in demand for goods.
E)a reduction in taxes causes a reduction in demand for goods.

Question 56

The IS curve will NOT shift when which of the following occurs?

A)a reduction in government spending.
B)a reduction in the interest rate.
C)a reduction in consumer confidence.
D)all of the above
E)none of the above

Question 57

If government spending and taxes increase by the same amount,

A)the IS curve does not shift
B)the IS curve shift leftward
C)the IS curve shifts rightward
D)the LM curve shifts downward

Question 58

First,define the LM curve.Second,explain why it has its particular shape.

Question 59

A reduction in the aggregate price level,P,will most likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 60

An increase in the aggregate price level,P,will most likely have which of the following effects?

A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve

Question 61

Based on your understanding of the IS-LM model,graphically illustrate and explain what effect a reduction in consumer confidence will have on output,the interest rate,and investment.

Question 62

Use the IS-LM model to answer this question.Suppose there is a simultaneous increase in government spending and increase in the money supply.Explain what effect this particular policy mix will have on output and the interest rate.Based on your analysis,do we know with certainty what effect this policy mix will have on investment? Explain.

Question 63

Explain in detail what effect an increase in government spending will have on: (1)the LM curve; and (2)the IS curve.

Question 64

Use the IS-LM model to answer this question.Suppose there is a simultaneous increase in taxes and reduction in the money supply.Explain what effect this particular policy mix will have on output and the interest rate.Based on your analysis,do we know with certainty what effect this policy mix will have on investment? Explain.

Question 65

Explain in detail what effect a reduction in government spending will have on: (1)the LM curve; and (2)the IS curve.

Question 66

What is the IS relation? Explain why IS curve is downward sloping.

Question 67

First,briefly explain what is meant by the policy mix.Second,explain what effect different policy mixes might have on the level of output,investment,and the interest rate.

Question 68

Use the IS-LM model to answer this question.Suppose there is a simultaneous increase in government spending and reduction in the money supply.Explain what effect this particular policy mix will have on output and the interest rate.Based on your analysis,do we know with certainty what effect this policy mix will have on investment? Explain.

Question 69

Explain in detail what effect a Fed purchase of bonds will have on: (1)the LM curve; and (2)the IS curve.

Question 70

Increases in the budget deficit are believed to cause reductions in investment.Based on your understanding of the IS-LM model,will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain.

Question 71

Explain in detail what effect a Fed sale of bonds will have on: (1)the LM curve; and (2)the IS curve.

Question 72

Based on your understanding of the IS-LM model,graphically illustrate and explain what effect a monetary expansion will have on output,the interest rate,and investment.

Question 73

Graphically derive the IS curve from the goods market equilibrium.