Question 1

A change in income in the IS-LM model for a fixed price represents a
A)shift in the aggregate demand curve. represents a movement along the aggregate demand curve.
B)has the same effect on the aggregate demand curve as a change in income in the IS-LM model resulting from a change in the price level.
C)does not represent a change in the aggregate demand curve.
D)and the interest rate in both the short and long runs.

Accepted Answer

A change in income in the IS-LM model for a fixed price represents a shift in the aggregate demand curve because it affects the equilibrium level of output and interest rates, altering the overall demand in the economy.

Question 2

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion but the money supply is held constant, then GDP will fall by about:
A)zero.
B)$25 billion.
C)$75 billion.
D)$100 billion.

Accepted Answer

The answer of According to the macroeconometric model developed by...

Question 3

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .
A)LM; right
B)LM; left
C)IS; right
D)IS; left

Accepted Answer

Increasing money growth causes an increase in the supply of money in the economy, which lowers interest rates and increases investment spending. This can be represented in the IS-LM model by shifting the LM curve to the right.

Question 4

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must the money supply.
A)increase
B)decrease
C)first increase and then decrease
D)first decrease and then increase

Accepted Answer

In the IS-LM model, an increase in taxes would shift the IS curve to the left, reducing income and output. To counteract this and hold income constant, the Fed would need to increase the money supply, which would shift the LM curve to the right, offsetting the leftward shift of the IS curve and stabilizing income.

Question 5

When bond traders for the Federal Reserve seek to decrease interest rates, they bonds, which shifts the curve to the right.
A)buy; IS
B)buy; LM
C)sell; IS
D)sell; LM

Accepted Answer

When bond traders for the Federal Reserve want to decrease interest rates, they buy bonds. This increases the demand for bonds, which in turn raises the price of bonds and decreases their yield. As a result, the LM curve (which shows the different combinations of interest rates and output levels that result in equilibrium in the money market) shifts to the right. By buying bonds, the Federal Reserve injects money into the economy, which can stimulate economic growth by making it easier for businesses and individuals to obtain credit.

Question 6

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, output and interest rates.
A)increase; lower
B)increase; raise
C)lower; lower
D)lower; raise

Accepted Answer

An increase in investment demand shifts the IS curve to the right, leading to an increase in both output and interest rates. This is because higher investment demand increases the demand for loanable funds, driving up interest rates, and consequently stimulating output through the multiplier effect.

Question 7

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must the money supply.
A)increase
B)decrease
C)first increase and then decrease
D)first decrease and then increase

Accepted Answer

If Congress raises taxes, it causes a leftward shift in the IS curve, leading to a decrease in output and an increase in the interest rate. If the Fed wants to hold the interest rate constant, it must increase the money supply to counteract the increase in interest rate caused by the tax hike. Therefore, the Fed must decrease the money supply to prevent an increase in interest rates.

Question 8

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
A)both consumption and investment remain unchanged.
B)consumption rises but investment falls.
C)investment rises but consumption falls.
D)both consumption and investment fall.

Accepted Answer

When the Fed raises the money supply to counteract the effects of higher taxes, it typically leads to lower interest rates. Lower interest rates make borrowing cheaper, which can encourage investment. However, higher taxes can reduce disposable income, leading to a potential decrease in consumption.

Question 9

In the IS-LM model, a decrease in output would be the result of a(n):
A)decrease in taxes.
B)increase in the money supply.
C)increase in money demand.
D)increase in government purchases.

Accepted Answer

According to the IS-LM model, a decrease in output is represented by a leftward shift of the IS curve. This shift can occur when there is an increase in money demand, which would cause a decrease in investment and consumption, leading to lower output levels. Choices A, B, and D would all lead to an increase in output according to the model, since they would cause a rightward shift of the IS curve.

Question 10

Assume the following model of the economy, with the price level fixed at 1.0:
C = 0.8(Y - T)
T = 1,000
I = 800 - 20r
G = 1,000
Y = C + I + G
Ms/P = Md/P = 0.4Y - 40r
Ms = 1,200
a. Write a numerical formula for the IS curve, showing Y as a function of r alone. (Hint: Substitute out C, I, G, and T.)
b. Write a numerical formula for the LM curve, showing Y as a function of r alone. (Hint: Substitute out M/P.)
c. What are the short-run equilibrium values of Y, r, Y - T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I.
d. Assume that G increases by 200. By how much will Y increase in short-run equilibrium? What is the government-purchases multiplier (the change in Y divided by the change in G)? 
e. Assume that G is back at its original level of 1,000, but Ms (the money supply) increases by 200. By how much will Y increase in short-run equilibrium? What is the multiplier for money supply (the change in Y divided by the change in Ms)?

Accepted Answer

The answer of Assume the following model of the economy,...

Question 11

An increase in taxes lowers income:
A)and the interest rate in the short run, but leaves both unchanged in the long run.
B)in the short run, but leaves it unchanged in the long run, while increasing consumption and lowering investment.
C)in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment.
D)and the interest rate in both the short and long runs.

Accepted Answer

The answer of An increase in taxes lowers income:
A)and the...

Question 12

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to income and a interest rate.
A)lower; lower
B)lower; higher
C)no change in; lower
D)no change in; higher

Accepted Answer

When Congress increases taxes to reduce the budget deficit while the Fed holds the money supply constant, it generally leads to lower income because the tax increase can reduce consumption and investment spending. With lower demand for goods and services, the economy might slow down, leading to lower income. Additionally, with lower demand in the economy, there's less demand for loans, which can lead to lower interest rates.

Question 13

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.
A)buy; IS
B)buy; LM
C)sell; IS
D)sell; LM

Accepted Answer

Selling bonds would decrease the money supply, which would increase interest rates. This shift would be reflected in the LM curve shifting to the left.

Question 14

An increase in consumer saving for any given level of income will shift the:
A)LM curve upward and to the left.
B)LM curve downward and to the right.
C)IS curve downward and to the left.
D)IS curve upward and to the right.

Accepted Answer

An increase in consumer saving will mean that consumption expenditure decreases and therefore aggregate demand falls. This will cause firms to reduce output and therefore reduce their demand for factors of production, including labour. The reduction in demand for labour will lead to higher unemployment and lower wages, both of which reduce income levels. Therefore, an increase in consumer saving will shift the IS curve downward and to the left.

Question 15

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and spending.
A)lower; raises; reduces
B)higher; lowers; increases
C)lower; lowers; increases
D)higher; raises; reduces

Accepted Answer

A higher price level results in a lower real money supply (M/P decreases), which raises the interest rate. Higher interest rates, in turn, reduce spending, leading to the downward slope of the aggregate demand curve.

Question 16

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be the response of GDP to a similar change with the money supply held constant.
A)less than half as great as
B)approximately equal to
C)more than two times as great as
D)more than three times as great as

Accepted Answer

The answer of According to the macroeconometric model developed by...

Question 17

In the IS-LM model, a decrease in the interest rate would be the result of a(n):
A)increase in the money supply.
B)increase in government purchases.
C)decrease in taxes.
D)increase in money demand.

Accepted Answer

According to the IS-LM model, a decrease in the interest rate occurs as a result of an increase in the money supply. This is because an increase in the money supply shifts the LM curve to the right, causing the equilibrium interest rate to decrease.

Question 18

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, output and interest rates.
A)increase; lower
B)increase; raise
C)lower; lower.
D)lower; raise

Accepted Answer

According to the IS-LM framework, an increase in the demand for money, at any given income level and level of interest rates, will lead to a decrease in output and an increase in interest rates. This occurs because an increase in the demand for money implies that people want to hold more money relative to other assets, which results in a decrease in consumption and investment expenditures, leading to a decrease in output. At the same time, as people hold more money, the supply of money in the economy decreases, which puts upward pressure on interest rates. Therefore, the correct answer is D: lower; raise.

Question 19

One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the curve to the .
A)LM; right
B)LM; left
C)IS; right
D)IS; left

Accepted Answer

Tax cuts increase disposable income, leading to higher consumption and investment, which shifts the IS curve to the right in the IS-LM model.

Question 20

An economic change that does not shift the aggregate demand curve is a change in:
A)the money supply.
B)the investment function.
C)the price level.
D)taxes.

Accepted Answer

A change in the price level does not shift the aggregate demand curve because the curve is drawn holding the price level constant. Any change in the price level would result in a movement along the aggregate demand curve, rather than a shift. Therefore, this is the correct answer. 
Choices A, B, and D all have the potential to shift the aggregate demand curve. A change in the money supply can increase or decrease consumer spending, and therefore shift the AD curve. The investment function can also increase or decrease investment spending, which would shift the curve. A change in taxes can affect disposable income and therefore aggregate demand as well.

Quiz 11: Aggregate Demand II: Applying the Is-Lm Model

A change in income in the IS-LM model for a fixed price represents a

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion but the money supply is held constant, then GDP will fall by about:

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must the money supply.

When bond traders for the Federal Reserve seek to decrease interest rates, they bonds, which shifts the curve to the right.

An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, output and interest rates.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must the money supply.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

In the IS-LM model, a decrease in output would be the result of a(n) :

An increase in taxes lowers income:

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to income and a interest rate.

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.

An increase in consumer saving for any given level of income will shift the:

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and spending.

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be the response of GDP to a similar change with the money supply held constant.

In the IS-LM model, a decrease in the interest rate would be the result of a(n) :

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, output and interest rates.

One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the curve to the .

An economic change that does not shift the aggregate demand curve is a change in: