Question 1

Studies have shown that the degree of international mobility of savings among the United States, Japan, and many European countries

Accepted Answer

The degree of international mobility of savings among the United States, Japan, and many European countries increased during the 1980s in comparison to the 1960s and 1970s, facilitated by deregulation, advances in technology, and globalization, which made it easier and more attractive to move capital across borders.

Question 2

At a point above the IS curve,

Accepted Answer

At a point above the IS curve, saving exceeds investment because the IS curve represents the equilibrium where investment equals savings. Above this curve, savings are higher than investment at the given interest rate.

Question 3

The IS curve depicts the relationship between

Accepted Answer

The IS curve depicts the relationship between aggregate demand for current output and the real interest rate. This curve shows the level of output that is consistent with a given combination of interest rates and aggregate demand. As the interest rate increases, investment demand decreases, leading to a decrease in output in the short-run.

Question 4

In a move down the IS curve,

Accepted Answer

The answer of In a move down the IS curve,
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Question 5

In a large open economy, the real interest rate does not have to fall by as much in order to restore equilibrium in the goods market in response to an increase in domestic output because

Accepted Answer

In a large open economy, some of the increase in desired domestic saving flows abroad. This means that there is a decreased pressure on the domestic interest rate to fall to stimulate investment and restore equilibrium in the goods market. As a result, the real interest rate does not have to fall by as much as it would in a closed economy.

Question 6

Which of the following would NOT cause the IS curve to shift to the left?

Accepted Answer

An increase in consumer confidence would shift the IS curve to the right, as it would increase consumption and investment spending, thus increasing the level of output and income. A decrease in government purchases (A), a decrease in foreign demand for domestic products (C), and a decrease in expected future profitability of capital (D) would all shift the IS curve to the left, as they would decrease consumption and investment spending, leading to a decrease in the level of output and income.

Question 7

In an open economy,

Accepted Answer

In an open economy, the goods market reaches equilibrium when the amount a country wants to lend internationally (or invest abroad) equals the amount it wants to borrow from other countries. This reflects the balance between a country's savings and its domestic plus foreign investment needs. Choices A, B, and C do not accurately describe the equilibrium condition in an open economy's goods market or the relationship between domestic and world real interest rates, which tend to equalize due to capital mobility.

Question 8

The level of full employment output

Accepted Answer

The level of full employment output is determined by factors such as capital stock, labor force, and technology, and is not affected by the real rate of interest. Therefore, this level remains constant regardless of changes in the real interest rate.

Question 9

In the savings-investment diagram, we know that an increase in the real interest rate raises the level of saving because

Accepted Answer

In the savings-investment diagram, the saving curve slopes upwards, indicating that as the real interest rate increases, the level of saving increases. This is because higher interest rates make saving more attractive relative to spending, leading individuals and institutions to save more.

Question 10

The intersection of the IS curve and the FE line

Accepted Answer

The intersection of the IS curve and the FE line represents goods market equilibrium, where planned spending equals actual output.

Question 11

In comparison with a closed economy, in a large open economy

Accepted Answer

In a large open economy, capital can flow across borders, which means that changes in desired investment have a smaller impact on the domestic real interest rate compared to a closed economy. The world interest rate influences the domestic rate, moderating the effect of domestic investment changes.

Question 12

In a large open economy,

Accepted Answer

In a large open economy, foreign saving and investment flows can have an impact on domestic saving and investment, meaning that they may not necessarily be equal.

Question 13

In a move up the IS curve,

Accepted Answer

In a move up the IS curve, output falls because it represents a higher interest rate leading to lower investment and thus lower output.

Question 14

During the first Gulf War

Accepted Answer

During the first Gulf War, there was an increase in uncertainty and a rise in oil prices, which led to a decrease in consumer and business confidence. This caused a decrease in investment and consumption spending, shifting the IS curve down to the left.

Question 15

Which of the following would NOT cause a shift in the IS curve?

Accepted Answer

An increase in the domestic real interest rate would cause a movement along the IS curve but would not shift it. Shifts in the IS curve are caused by changes in exogenous variables such as changes in consumer confidence, expected future profitability of capital, and government purchases.

Question 16

With respect to the IS curve for a small open economy

Accepted Answer

The answer of With respect to the IS curve for...

Question 17

At a point below the IS curve,

Accepted Answer

At a point below the IS curve, there is an excess demand for goods. This is because the level of output is less than the level of output demanded at the given interest rate. As a result, firms will increase production to meet this excess demand, leading to an increase in the level of output and a movement along the IS curve towards the equilibrium point.

Question 18

At a point below the IS curve,

Accepted Answer

Below the IS curve, the demand for goods and services is less than their supply. This leads to lower prices and therefore a lower level of output. To encourage firms to invest, the real interest rate needs to be reduced below its equilibrium value, which is achieved with expansionary monetary policy.

Question 19

The IS curve for a small open economy is

Accepted Answer

The IS curve for a small open economy is horizontal at the world real interest rate because small open economies are price takers in the world financial markets, meaning they borrow or lend at the given world interest rate, which makes their investment and thus their IS curve insensitive to their own changes in interest rates.

Question 20

At points not on the IS curve,

Accepted Answer

The IS curve represents all points where investment (I) equals savings (S), so at points not on the IS curve, saving does not equal investment.

Quiz 24: Linking the Financial System and the Economy: the Is-Lm-Fe Model

Studies have shown that the degree of international mobility of savings among the United States, Japan, and many European countries

At a point above the IS curve,

The IS curve depicts the relationship between

In a move down the IS curve,

In a large open economy, the real interest rate does not have to fall by as much in order to restore equilibrium in the goods market in response to an increase in domestic output because

Which of the following would NOT cause the IS curve to shift to the left?

In an open economy,

The level of full employment output

In the savings-investment diagram, we know that an increase in the real interest rate raises the level of saving because

The intersection of the IS curve and the FE line

In comparison with a closed economy, in a large open economy

In a large open economy,

In a move up the IS curve,

During the first Gulf War

Which of the following would NOT cause a shift in the IS curve?

With respect to the IS curve for a small open economy

At a point below the IS curve,

At a point below the IS curve,

The IS curve for a small open economy is

At points not on the IS curve,