Question 1

Suppose the intersection of the IS and LM curves is to the right of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

Accepted Answer

A rise in the price level would decrease the real money supply, shifting the LM curve up and left, moving the economy back to the full employment equilibrium on the FE line.

Question 2

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Accepted Answer

An increase in expected inflation lowers the real interest rate because the nominal interest rate does not immediately adjust. This lower real interest rate stimulates investment and consumption, leading to an increase in output in the short run.

Question 3

Keynesian economists believe that in the short run,

Accepted Answer

Keynesian economists believe that in the short run, money neutrality does not exist and prices do not adjust rapidly. They argue that changes in aggregate demand, usually through government spending or monetary policy, can lead to changes in output and employment levels without causing immediate changes in prices. This is known as the "sticky price" or "menu cost" theory, where firms are hesitant to adjust their prices immediately in response to changes in demand due to the cost and inconvenience of changing prices frequently. Therefore, Keynesians believe that active government intervention is necessary to stabilize the economy in the short run.

Question 4

Under an assumption of monetary neutrality,a change in the nominal money supply has

Accepted Answer

Under the assumption of monetary neutrality, a change in the nominal money supply is believed to have a proportionate effect on the price level, meaning that if the money supply doubles, the price level is also expected to double, leaving real variables unaffected in the long run.

Question 5

An increase in money demand causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Accepted Answer

An increase in money demand causes a decrease in the money supply, which leads to an increase in the nominal interest rate. However, in the short run, prices do not adjust immediately, so the increase in the nominal interest rate leads to a decrease in investment and consumption spending, which leads to a decrease in output. Therefore, the correct answer is B, which indicates that the real interest rate rises and output falls.

Question 6

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

Accepted Answer

The answer of An adverse supply shock that is permanent...

Question 7

Suppose the intersection of the IS and LM curves is to the right of the FE line.An increase in the price level would most likely eliminate a disequilibrium among the asset,labour,and goods markets by

Accepted Answer

When the intersection of IS and LM curves is to the right of FE line, there is excess demand, which leads to an increase in the price level. This increase in the price level would cause an increase in money demand, which shifts the LM curve up until the equilibrium is reached at the intersection of IS, LM, and FE curves. Therefore, the best choice would be to shift the LM curve up (Option A).

Question 8

The aggregate demand curve shows

Accepted Answer

The aggregate demand curve shows the relation between the aggregate quantity of goods demanded and the price level. It represents the total demand for goods and services in an economy at different price levels. As the price level decreases, the quantity demanded of goods and services increases and vice versa. This is because consumers are more likely to purchase goods and services at lower prices.

Question 9

Classical economists think general equilibrium is attained relatively quickly because

Accepted Answer

Classical economists believe that markets are efficient and flexible, with prices adjusting quickly to attain equilibrium. Therefore, the price level is expected to adjust quickly to eliminate any excess supply or demand in the market. In contrast, changes in real interest rates, output, and wage rates may take longer to adjust to restore equilibrium.

Question 10

Which market adjusts the most quickly in response to shocks to the economy?

Accepted Answer

The asset market adjusts the most quickly because it involves financial instruments that can be traded rapidly, allowing prices to change almost instantaneously in response to new information or shocks.

Question 11

Classical economists believe that in the short run,

Accepted Answer

Classical economists believe that money neutrality exists, which means that changes in the money supply do not affect real economic variables in the long run. However, in the short run, they believe that prices are flexible and adjust rapidly to changes in supply and demand, leading to equilibrium. Therefore, in the short run, Option A is the best choice.

Question 12

A decrease in taxes (when Ricardian equivalence doesn't hold)causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Accepted Answer

A decrease in taxes increases disposable income, which leads to an increase in aggregate demand. This increase in demand causes the real interest rate to rise and output to rise in the short run.

Question 13

Keynesian economists think general equilibrium is not attained quickly because

Accepted Answer

The answer of Keynesian economists think general equilibrium is not...

Question 14

A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Accepted Answer

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

Question 15

Suppose the intersection of the IS and LM curves is to the left of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

Accepted Answer

A fall in the price level would increase real money balances, shifting the LM curve down/right, moving the economy towards the full employment equilibrium where the IS-LM intersection aligns with the FE line.

Question 16

An increase in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Accepted Answer

An increase in money supply reduces the interest rate, leading to an increase in investment and aggregate demand. This causes output to increase in the short run.

Question 17

Which of the following best describes the classical and the Keynesian views on the monetary neutrality?

Accepted Answer

The answer of Which of the following best describes the...

Question 18

After a temporary adverse supply shock hits the economy,general equilibrium is restored by

Accepted Answer

The answer of After a temporary adverse supply shock hits...

Question 19

A temporary adverse supply shock directly causes

Accepted Answer

A temporary adverse supply shock causes a decrease in the potential output or the natural rate of output. This shift in the production function leads to a leftward shift of the FE (or LRAS) line. The IS curve and the LM curve shift in opposite directions in response to the shock, but the net effect on these curves is ambiguous, depending on the relative magnitudes of the shifts. Therefore, the correct choice is B - a shift to the left of the FE line.

Question 20

An adverse supply shock to the economy would

Accepted Answer

An adverse supply shock, such as an increase in the price of oil or a decrease in production due to a natural disaster, would lead to a decrease in investment because it would make it more expensive for firms to produce goods and services. However, if the shock were permanent, then the economy would adjust over time, and the real interest rate may not necessarily rise. In contrast, if the shock were temporary, then the real interest rate might rise as firms compete for scarce resources. Therefore, Choice B is the best answer.

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

Suppose the intersection of the IS and LM curves is to the right of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

An increase in expected inflation causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

Keynesian economists believe that in the short run,

Under an assumption of monetary neutrality,a change in the nominal money supply has

An increase in money demand causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

Suppose the intersection of the IS and LM curves is to the right of the FE line.An increase in the price level would most likely eliminate a disequilibrium among the asset,labour,and goods markets by

The aggregate demand curve shows

Classical economists think general equilibrium is attained relatively quickly because

Which market adjusts the most quickly in response to shocks to the economy?

Classical economists believe that in the short run,

A decrease in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

Keynesian economists think general equilibrium is not attained quickly because

A temporary decrease in government purchases causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

Suppose the intersection of the IS and LM curves is to the left of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

An increase in money supply causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

Which of the following best describes the classical and the Keynesian views on the monetary neutrality?

After a temporary adverse supply shock hits the economy,general equilibrium is restored by

A temporary adverse supply shock directly causes

An adverse supply shock to the economy would

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

Suppose the intersection of the IS and LM curves is to the right of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Keynesian economists believe that in the short run,

Under an assumption of monetary neutrality,a change in the nominal money supply has

An increase in money demand causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

Suppose the intersection of the IS and LM curves is to the right of the FE line.An increase in the price level would most likely eliminate a disequilibrium among the asset,labour,and goods markets by

The aggregate demand curve shows

Classical economists think general equilibrium is attained relatively quickly because

Which market adjusts the most quickly in response to shocks to the economy?

Classical economists believe that in the short run,

A decrease in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Keynesian economists think general equilibrium is not attained quickly because

A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Suppose the intersection of the IS and LM curves is to the left of the FE line.What would most likely eliminate a disequilibrium among the asset,labour,and goods markets?

An increase in money supply causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.

Which of the following best describes the classical and the Keynesian views on the monetary neutrality?

After a temporary adverse supply shock hits the economy,general equilibrium is restored by

A temporary adverse supply shock directly causes

An adverse supply shock to the economy would

An increase in expected inflation causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

An increase in money demand causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

A decrease in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

A temporary decrease in government purchases causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.

An increase in money supply causes the real interest rate to and output to in the short run,before prices adjust to restore equilibrium.