Deck 25: Money and Economic Stability in the ISLM World

Question 1

When the LM curve is vertically sloped, the __________ in income due to a change in the money supply will be __________ when the LM curve is positively sloped, but not vertical.

A) decrease; greater
B) decrease; smaller
C) increase; greater
D) increase; smaller

Answer 1

C

Question 2

With velocity constant, an increase in the money supply multiplied by velocity yields the increase in equilibrium

A) interest rates.
B) money demand.
C) price level.
D) income.

Answer 2

D

Question 3

With velocity constant and equal to 2, a $10 billion increase in the money supply shifts the LM curve to the right by

A) $2 billion.
B) $5 billion.
C) $10 billion.
D) $20 billion.

Answer 3

D

Question 4

Monetary policy has no effect on the equilibrium interest rate if

A) the inflation rate is zero.
B) the economy is in the liquidity trap.
C) velocity is constant.
D) the economy is at full employment.

Question 5

If velocity is constant and equal to 5, a $20 billion shift of the LM curve to the right will be produced by a __________ in the money supply.

A) $100 billion increase
B) $100 billion decrease
C) $4 billion increase
D) $4 billion decrease

Question 6

If investment becomes more interest-sensitive,

A) monetary policy will have a smaller impact on the equilibrium interest rate.
B) monetary policy will have a greater impact on equilibrium income.
C) fiscal policy will have a smaller impact on equilibrium income.
D) fiscal policy will have a larger impact on the equilibrium interest rate.

Question 7

Monetary policy has no effect on equilibrium income when the

A) LM curve is positively sloped.
B) IS curve is negatively sloped.
C) IS curve is vertical.
D) IS curve is horizontal.

Question 8

If you believe that the LM curve is horizontal, what type of policy would you recommend to stimulate the economy?

A) An increase in government spending
B) A reduction in government spending
C) An increase in the money supply
D) A reduction in the interest rate

Question 9

If you believe that the LM curve is vertical, what type of policy would you recommend to stimulate the economy?

A) An increase in government spending
B) A reduction in government spending
C) An increase in the money supply
D) A reduction in the interest rate

Question 10

If the LM function is vertical, then __________ is constant.

A) the price level
B) the interest rate
C) velocity
D) investment

Question 11

Monetarists argue that aggregate demand is

A) vertical.
B) horizontal.
C) relatively unaffected by autonomous spending shifts.
D) relatively unaffected by changes in the money supply.

Question 12

A vertical LM curve means that

A) monetary policy has no impact on the interest rate.
B) monetary policy has no impact on income.
C) fiscal policy has no impact on the interest rate.
D) fiscal policy has no impact on income.

Question 13

The expenditure multiplier is smallest when the

A) LM curve is positively sloped.
B) LM curve is horizontal.
C) IS curve is vertical.
D) LM curve is vertical.

Question 14

Fiscal policy is most effective when

A) the LM curve is vertical.
B) the LM curve is horizontal.
C) the LM curve is positively sloped.
D) the LM curve is negatively sloped.

Question 15

When the economy is in the liquidity trap, the

A) LM curve is horizontal.
B) LM curve is vertical.
C) IS curve is horizontal.
D) IS curve is vertical.

Question 16

Monetarists argue that the demand for money is unresponsive to interest rates, i.e. depends on income only, produces a

A) vertical LM function.
B) horizontal LM function.
C) vertical IS function.
D) horizontal IS function.

Question 17

The expenditure multiplier is greatest when the

A) LM curve is positively sloped.
B) LM curve is horizontal.
C) IS curve is vertical.
D) LM curve is vertical.

Question 18

If investment is interest-insensitive,

A) monetary policy has no impact on equilibrium income.
B) monetary policy has no impact on the equilibrium interest rate.
C) fiscal policy has no impact on equilibrium income.
D) fiscal policy has no impact on the equilibrium interest rate.

Question 19

If velocity is constant and equal to 2, a $10 billion shift of the LM curve to the left will be produced by a __________ in the money supply.

A) $5 billion increase
B) $5 billion decrease
C) $20 billion increase
D) $20 billion decrease

Question 20

Monetarists argue that stability in the economy is maintained by fluctuations in

A) velocity.
B) money demand.
C) money supply.
D) the price level.

Question 21

The LM curve automatically shifts to the right when the intersection point of the IS and LM curves occurs at a point

A) beyond full-employment income.
B) in the liquidity trap.
C) less than full-employment income.
D) where planned saving is less than planned investment.

Question 22

If investment spending is interest-sensitive and highly unstable, the Federal Reserve could minimize fluctuations in income by targeting

A) velocity.
B) the interest rate.
C) the money supply.
D) government debt.

Question 23

If the economy is at full employment, anything that causes the level of income to change will cause fluctuations in the __________ that will shift the __________ curve and thus help stabilize economic activity

A) price level; IS
B) price level; LM
C) interest rate; IS
D) interest rate; LM

Question 24

In a liquidity trap, expansionary monetary policy has __________ effect on output, and expansionary fiscal policy has __________ effect on output.

A) no; no
B) no; a strong
C) a strong; no
D) a strong; strong

Question 25

Fluctuating interest rates tend to stabilize real output when the

A) IS curve is flat.
B) IS curve is steep.
C) LM curve is flat.
D) LM curve is steep.

Question 26

The expenditure multiplier in the ISLM framework is smaller than that derived from the simple Keynesian model because

A) velocity is always assumed to be constant.
B) the economy is assumed to be in the liquidity trap.
C) the aggregate supply curve is assumed to be horizontal.
D) the LM curve is assumed to have a positive slope.

Question 27

If investment has a low sensitivity to the interest rate, the IS curve is rather __________, so that monetary policy has a __________ effect on GDP.

A) flat; strong
B) flat; weak
C) steep; strong
D) steep; weak

Question 28

Fluctuating interest rates tend to cause large changes in real output when the

A) IS curve is flat.
B) IS curve is steep.
C) LM curve is flat.
D) LM curve is steep.

Question 29

An increase in autonomous spending is sure to reduce the real money supply when

A) the economy is in the liquidity trap.
B) the IS curve is vertical.
C) the economy is at full employment.
D) velocity is constant.

Question 30

If investment has a high sensitivity to the interest rate, the IS curve is rather __________, so that monetary policy has a __________ effect on GDP.

A) flat; strong
B) flat; weak
C) steep; strong
D) steep; weak

Question 31

If the LM curve is subject to wider fluctuations than the IS curve, the Federal Reserve could minimize GDP fluctuations by targeting

A) money demand.
B) money supply.
C) the interest rate.
D) the price level.

Question 32

With an upward sloping LM curve, a falling interest rate __________ money demand, so that an expansionary monetary policy is __________ than in the case of a vertical LM curve.

A) raises; stronger
B) raises; weaker
C) has no effect on; stronger
D) has no effect on; weaker

Question 33

The assumption of variable velocity translates to, in IS-LM analysis, __________ curves.

A) downward sloping IS
B) vertical IS
C) upward sloping LM
D) vertical LM

Question 34

Which of the following is not generally discussed at a "special case" of IS-LM analysis?

A) Horizontal IS
B) Vertical IS
C) Horizontal LM
D) Vertical LM

Question 35

A horizontal LM curve implies that the expenditure multiplier, when compared with the simple Keynesian expenditure multiplier, is

A) smaller.
B) larger.
C) equal.
D) equal to the inverse of the simple multiplier.

Question 36

The LM curve automatically shifts to the left when the intersection point of the IS and LM curves occurs at a point

A) beyond full-employment income.
B) in the liquidity trap.
C) less than full-employment income.
D) where planned saving is less than planned investment.

Question 37

With a change in the money supply, a vertical LM curve shifts a horizontal distance equal to

A) that change.
B) that change times velocity.
C) that change divided by velocity.
D) that change times the simple Keynesian multiplier.

Question 38

"If the money supply rises by $1 billion, GDP will rise until it alone increases the quantity of money demanded by $1 billion." This describes the situation when

A) an IS curve shifts against a horizontal LM curve.
B) an IS curve shifts against a vertical LM curve.
C) a vertical LM curve shifts against an IS curve.
D) a horizontal LM curve shifts against an IS curve.

Question 39

With an upward sloping LM curve, a rising interest rate __________ money demand, so that a contractionary monetary policy is __________ than in the case of a vertical LM curve.

A) raises; stronger
B) raises; weaker
C) lowers; stronger
D) lowers; weaker

Question 40

Real economic activity at full employment is unaffected by changes in investment spending when

A) interest rates are low.
B) velocity is flexible.
C) inventories are low.
D) prices are flexible.

Question 41

Which of the following will increase the natural rate of interest?

A) An increase in the saving rate
B) A decrease in inflationary expectations
C) An increase in government spending
D) A decrease in the money supply

Question 42

Which of the following will decrease the natural rate of interest?

A) An increase in taxes
B) An increase in investment spending
C) A decrease in inflationary expectations
D) An increase in the money supply

Question 43

"Complete" crowding out of fiscal policy occurs when the

A) LM curve is horizontal.
B) LM curve is upward-sloping.
C) LM curve is vertical.
D) IS curve is vertical.

Question 44

When money supply __________, the real rate of interest __________.

A) increases; falls
B) increases; rises
C) decreases; rises
D) increases; remains unchanged

Question 45

The natural rate of interest is the rate

A) which equates saving and investment under any employment condition.
B) which equates saving and investment with acceptable, but low, unemployment.
C) which equates saving and investment at an unemployment rate of 5 percent or less.
D) which equates saving and investment at full employment.

Question 46

The natural rate of interest rises with a __________ shift of the __________ curve.

A) rightward; IS
B) rightward; LM
C) leftward; IS
D) leftward; LM

Question 47

"Partial" crowding out of fiscal policy occurs when the

A) LM curve is horizontal.
B) LM curve is upward-sloping.
C) LM curve is vertical.
D) IS curve is vertical.

Question 48

An upward-sloping LM curve implies that the expenditure multiplier, when compared with the simple Keynesian expenditure multiplier, is

A) smaller.
B) larger.
C) equal.
D) equal to the inverse of the simple multiplier.

Question 49

The natural rate of interest falls with a __________ shift of the __________ curve.

A) rightward; IS
B) rightward; LM
C) leftward; IS
D) leftward; LM

Question 50

Most economists believe the LM curve to be

A) horizontal most of the time.
B) upward-sloping.
C) vertical.
D) downward-sloping.

Question 51

Monetary policy is impotent when the LM curve is

A) vertical.
B) horizontal.
C) downward-sloping.
D) horizontal or downward-sloping.

Question 52

The rate of interest that equates saving and investment at full employment is called the

A) real rate.
B) nominal rate.
C) natural rate.
D) discount rate.

Question 53

The natural rate of interest is the interest rate that

A) is determined by the intersection of the IS and LM curves.
B) equates investment and saving at full employment.
C) equates the supply and demand for money.
D) is changed only by changes in the money supply.

Question 54

In the IS-LM model, the expenditure multiplier is [1/(1-b)] when the

A) LM curve is horizontal.
B) LM curve is upward-sloping.
C) LM curve is vertical.
D) IS curve is vertical.

Question 55

A relatively flat LM curve implies that wide fluctuations in the goods sector cause

A) wide fluctuations in real output.
B) wide fluctuations in the price level.
C) wide fluctuations in the interest rate.
D) crowding out of private investment.

Question 56

Fiscal policy is impotent when the LM curve is

A) vertical.
B) horizontal.
C) downward-sloping.
D) horizontal or downward-sloping.

Question 57

A relatively steep LM curve implies that wide fluctuations in the goods sector cause

A) wide fluctuations in real output.
B) wide fluctuations in the price level.
C) wide fluctuations in the interest rate.
D) crowding out of private investment.

Question 58

A horizontal LM curve implies that the expenditure multiplier, when compared with the simple Keynesian expenditure multiplier, is

A) smaller.
B) larger.
C) equal.
D) equal to the inverse of the simple multiplier.

Question 59

If we are in a horizontal region of the money demand curve, expansionary monetary policy has __________ effect on output and expansionary fiscal policy has __________ effect on output.

A) no; no
B) no; a strong
C) a strong; no
D) a strong; a strong

Question 60

In an IS-LM model with an upward-sloping LM curve and a downward-sloping IS, how does the expenditure multiplier compare to [1/(1-b)]?

A) It is equal to it.
B) It is greater.
C) It is smaller.
D) Cannot be answered with the information given.

Question 61

A rise in the money supply __________ the natural rate of interest.

A) lowers
B) raises
C) has no effect on
D) has an uncertain effect on

Question 62

A rise in government expenditure __________ the natural rate of interest.

A) lowers
B) raises
C) has no effect on
D) has an uncertain effect on

Question 63

Monetarists believe in a relatively unstable __________ curve, and thus recommend a monetary policy targeting the __________.

A) IS; money supply
B) IS; interest rate
C) LM; money supply
D) LM; interest rate

Question 64

Keynesians believe in a relatively stable __________ curve, and thus recommend a monetary policy targeting the __________.

A) IS; money supply
B) IS; interest rate
C) LM; money supply
D) LM; interest rate

Question 65

The quantity of money demanded increases at every combination of GDP and interest rate. If the Fed holds to an unchanged interest rate target, the interest rate __________ and GDP __________.

A) rises; falls
B) rises; remains unchanged
C) remains unchanged; remains unchanged
D) remains unchanged; falls

Question 66

When the economy is at full employment __________ interest rates are __________ by an expansionary monetary policy if inflationary expectations are generated.

A) real; decreased
B) real; not changed
C) nominal; decreased
D) nominal; not changed

Question 67

"A drop in the money supply lowered output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

A) rose; rise
B) rose; fall
C) fell; rise
D) fell; fall

Question 68

"A rise in the money supply raised output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

A) rose; rise
B) rose; fall
C) fell; rise
D) fell; fall

Question 69

"A rise in government expenditures raised output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

A) rose; rise
B) rose; fall
C) fell; rise
D) fell; fall

Question 70

Suppose that IS and LM intersect at full-employment output. A rightward shift of LM will be followed by a __________ price level that shifts LM to the __________ in a return to full employment.

A) rising; right
B) rising; left
C) falling; right
D) falling; left

Question 71

The quantity of money demanded suddenly increases at every combination of GDP and interest rate. If the Fed holds to an unchanged money supply target, the interest rate __________ and GDP __________.

A) rises; falls
B) rises; remains unchanged
C) remains unchanged; remains unchanged
D) remains unchanged; falls

Question 72

The quantity of money demanded decreases at every combination of GDP and interest rate. If the Fed holds to an unchanged money supply target, the interest rate __________ and GDP __________.

A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls

Question 73

The natural rate of interest is a __________ rate that __________ inflationary expectations.

A) nominal; includes
B) nominal; excludes
C) real; includes
D) real; excludes

Question 74

Suppose that IS and LM intersect at full-employment output. A rightward shift of IS will be followed by a __________ price level that shifts LM to the __________ in a return to full-employment.

A) rising; right
B) rising; left
C) falling; right
D) falling; left

Question 75

The quantity of money demanded increases at every combination of GDP and interest rate. If the Fed holds to an unchanged interest rate target, the interest rate __________ and GDP __________.

A) rises; falls
B) rises; remains unchanged
C) remains unchanged; remains unchanged
D) remains unchanged; falls

Question 76

Suppose that IS and LM intersect at full-employment output. A leftward shift of LM will be followed by a __________ price level that shifts LM to the __________ in a return to full employment.

A) rising; right
B) rising; left
C) falling; right
D) falling; left

Question 77

Starting from full employment output, fiscal policy will be completely crowded out in real terms, even with __________ LM curve, so long as prices are __________.

A) a vertical; flexible
B) a vertical; fixed
C) an upward-sloping; flexible
D) an upward-sloping; fixed

Question 78

Suppose that IS and LM intersect at full-employment output. A leftward shift of IS will be followed by a __________ price level that shifts LM to the __________ in a return to full employment.

A) rising; right
B) rising; left
C) falling; right
D) falling; left

Question 79

"A drop in government expenditures lowered output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

A) rose; rise
B) rose; fall
C) fell; rise
D) fell; fall

Question 80

When the economy is at full employment __________ interest rates are __________ by an expansionary monetary policy if inflationary expectations are generated.

A) real; decreased
B) real; increased
C) nominal; decreased
D) nominal; increased