Question 1

Which of the following would shift the LM curve up?
A)an increase in consumer spending
B)an increases in taxes
C)a decrease in supply of money
D)a decrease in taxes

Accepted Answer

A decrease in supply of money means that there is less money available for investment, which leads to higher interest rates. Higher interest rates increase the cost of borrowing, discouraging investment and consumption, which in turn lowers aggregate demand. This shift in money demand upward would shift the LM curve up.

Note: A and D may impact aggregate demand, but they do not directly shift the LM curve. B, on the other hand, would shift the IS curve upward as it reduces consumer spending and investment, leading to a lower output and higher interest rate.

Question 2

A tax cut on capital will
A)shift the IS curve down and to the left.
B)shift the LM curve up and to the right.
C)shift the IS curve up and to the right.
D)shift the LM curve down and to the left.

Accepted Answer

A tax cut on capital increases investment, which shifts the IS curve up and to the right as it increases aggregate demand.

Question 3

A decrease in the effective tax rate on capital would shift the IS curve ________ and the LM curve ________.
A)down;is unchanged
B)down;left
C)up;is unchanged
D)up;left

Accepted Answer

C

Question 4

A rise in the price of a bond causes the yield of the bond to
A)rise.
B)fall.
C)remain unchanged.
D)rise if it's a short-term bond and fall if it's a long-term bond.

Accepted Answer

The yield of a bond is inversely related to its price. When the price of a bond rises, the yield falls, because the fixed interest payments represent a smaller percentage of the higher price.

Question 5

A rise in expected future output that doesn't affect labour supply would shift the IS curve ________ and the FE line ________.
A)down;is unchanged
B)down;right
C)up;is unchanged
D)up;right

Accepted Answer

A rise in expected future output increases current consumption, shifting the IS curve up. Since labor supply is unaffected, the FE line remains unchanged.

Question 6

The FE line shows the level of output at which the ________ market is in equilibrium.
A)goods
B)asset
C)labour
D)money

Accepted Answer

The FE line represents the full employment level of output, indicating equilibrium in the labor market where all available resources are efficiently utilized.

Question 7

The FE line is vertical because the level of output at full employment doesn't depend on the
A)real wage rate.
B)level of employment.
C)marginal product of labour.
D)real interest rate.

Accepted Answer

The FE line is vertical because full employment output is determined by factors like technology and resources, not by the real interest rate.

Question 8

The IS curve would unambiguously shift up if there were
A)an increase in both government purchases and corporate taxes.
B)an increase in both government purchases and the expected future marginal product of capital.
C)an increase in the expected future marginal product of capital and a decrease in expected future output.
D)a decrease in both corporate taxes and the expected future marginal product of capital.

Accepted Answer

An increase in government purchases would shift the IS curve up. An increase in the expected future marginal product of capital would increase investment and shift the IS curve up as well. Therefore, option B is the correct answer as it includes both of these factors. Options A, C, and D include contradictory factors that would shift the IS curve in different directions.

Question 9

Which of the following would shift the FE line to the right?
A)an adverse supply shock
B)a decrease in labour supply
C)an increase in the capital stock
D)an increase in the future marginal productivity of capital

Accepted Answer

An increase in the capital stock would increase the potential output (Y*) of the economy, shifting the FE line to the right. An adverse supply shock (A) or a decrease in labor supply (B) would decrease potential output and shift the FE line to the left. An increase in the future marginal productivity of capital (D) could lead to an increase in investment and potential output, but it would not necessarily shift the FE line in itself.

Question 10

A temporary increase in government purchases causes the real interest rate to ________ and output to ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)rise;remain unchanged

Accepted Answer

The answer of A temporary increase in government purchases causes...

Question 11

Classical economists argue that an increase in government expenditures will
A)shift FE line to right increasing full-employment output.
B)shift FE line to left decreasing full-employment output.
C)shift FE line to right increasing interest rate.
D)shift FE line to right decreasing labour supply.

Accepted Answer

Classical economists believe in the concept of Say's Law, which states that supply creates its own demand. Therefore, an increase in government expenditures would increase demand and ultimately shift the FE line to the right, leading to an increase in full-employment output. This is based on the assumption that there are no long-term supply-side constraints that would limit the economy's ability to produce more output.

Question 12

A temporary supply shock,such as an increase in oil prices,would
A)shift the IS curve down and leave the FE line unchanged.
B)shift the IS curve down and shift the FE line to the left.
C)shift the IS curve up but leave the FE line unchanged.
D)have no effect on the IS curve.

Accepted Answer

A temporary supply shock, like an increase in oil prices, affects the supply side of the economy, not the demand side, so it does not shift the IS curve, which represents equilibrium in the goods market.

Question 13

Which of the following would shift the FE line to the left?
A)a beneficial supply shock
B)a decrease in labour supply
C)an increase in the capital stock
D)a decrease in the future marginal productivity of capital

Accepted Answer

A decrease in labour supply would shift the FE line to the left because there would be fewer workers available to produce goods and services, leading to a decrease in potential output.

Question 14

Which of the following will shift IS curve down and to the left?
A)an increase in expected future output
B)a decrease in expected future marginal product of capital
C)a fall in taxes
D)an increase in wealth

Accepted Answer

A decrease in expected future marginal product of capital would reduce current investment, leading to a decrease in aggregate demand and a leftward shift of the IS curve. None of the other options would lead to a downward and leftward shift of the IS curve. An increase in expected future output or wealth would increase current consumption and investment, shifting the IS curve to the right. A fall in taxes would increase disposable income and spending, shifting the IS curve to the right as well.

Question 15

A decline in wealth that doesn't affect labour supply would shift the IS curve ________ and the FE line ________.
A)down;is unchanged
B)down;left
C)up;is unchanged
D)up;left

Accepted Answer

A decline in wealth would lead to a decrease in consumption, leading to a decrease in aggregate demand and a downward shift in the IS curve. Labour supply is not affected, so the FE line remains unchanged.

Question 16

Because of a widespread fraud,people have decided not to use their debit card for their purchases anymore.This will cause
A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)the IS curve to shift down and to the right.
D)the IS curve to shift up and to the left.

Accepted Answer

The LM curve shows the relationship between the interest rate and the money supply. A widespread fraud would cause people to lose confidence in the banking system and reduce their demand for money. This would shift the LM curve to the left, as people would be willing to hold less money at any given interest rate.

Question 17

Any change that reduces desired saving relative to desired investment (for a given level of output)causes the real interest rate to ________ and shifts the IS curve ________.
A)increase;down
B)increase;up
C)decrease;down
D)decrease;up

Accepted Answer

A reduction in desired saving relative to desired investment increases the real interest rate to restore equilibrium, shifting the IS curve up.

Question 18

A temporary supply shock,such as a bumper crop,would
A)shift the FE line to the right and leave the IS curve unchanged.
B)shift the FE line to the left and shift the IS curve up.
C)shift the FE line to the left and leave the IS curve unchanged.
D)have no effect on the FE line.

Accepted Answer

A temporary supply shock, such as a bumper crop, is a positive event for the economy as it results in an increase in the output that the economy can produce. This increase in potential output will shift the FE (full employment) line to the right, indicating that the economy can now produce more at any given level of employment. However, since the IS (investment-saving) curve represents the equilibrium in the goods and services market, it remains unchanged as a supply shock does not directly affect the demand for goods and services.

Question 19

The IS curve shows the combinations of output and the real interest rate for which
A)the goods market is in equilibrium.
B)the labour market is in equilibrium.
C)the financial asset market is in equilibrium.
D)an increase in output will cause the market-clearing interest rate to be bid up.

Accepted Answer

The IS curve shows the combinations of output and the real interest rate for which the goods market is in equilibrium. This means that the level of output generated by firms is equal to the level of output demanded by households and firms. The real interest rate adjusts to maintain this equilibrium.

Question 20

A temporary decline in government purchases would shift the IS curve ________ and the LM curve ________.
A)down;is unchanged
B)down;left
C)up;is unchanged
D)up;left

Accepted Answer

A temporary decline in government purchases would shift the IS curve down because it would decrease planned spending and thus decrease equilibrium output. The LM curve would be unchanged because it represents the relationship between interest rates and income, which is not affected by government purchases.

Quiz 9: The Is-Lm-Fe Model: a General Framework for Macroeconomic Analysis

Which of the following would shift the LM curve up?

A tax cut on capital will

A decrease in the effective tax rate on capital would shift the IS curve and the LM curve .

A rise in the price of a bond causes the yield of the bond to

A rise in expected future output that doesn't affect labour supply would shift the IS curve and the FE line .

The FE line shows the level of output at which the ________ market is in equilibrium.

The FE line is vertical because the level of output at full employment doesn't depend on the

The IS curve would unambiguously shift up if there were

Which of the following would shift the FE line to the right?

A temporary increase in government purchases causes the real interest rate to and output to .

Classical economists argue that an increase in government expenditures will

A temporary supply shock,such as an increase in oil prices,would

Which of the following would shift the FE line to the left?

Which of the following will shift IS curve down and to the left?

A decline in wealth that doesn't affect labour supply would shift the IS curve and the FE line .

Because of a widespread fraud,people have decided not to use their debit card for their purchases anymore.This will cause

Any change that reduces desired saving relative to desired investment (for a given level of output) causes the real interest rate to and shifts the IS curve .

A temporary supply shock,such as a bumper crop,would

The IS curve shows the combinations of output and the real interest rate for which

A temporary decline in government purchases would shift the IS curve and the LM curve .