Question 1

The IS curve shifts to the left when
A)taxes increase.
B)government spending increases.
C)the money supply increases.
D)autonomous planned investment spending increases.

Accepted Answer

The IS curve shows the negative relationship between the real interest rate and real GDP. When taxes increase, disposable income decreases, leading to a decrease in consumption expenditure. This, in turn, reduces aggregate demand and leads to a decrease in real GDP at each interest rate. Therefore, the IS curve shifts to the left.

Question 2

A tax increase ________ disposable income,________ consumption expenditure,and shifts the IS curve to the ________,everything else held constant.
A)increases;increases;right
B)increases;decreases;left
C)decreases;increases;left
D)decreases;decreases;left

Accepted Answer

A tax increase reduces disposable income, which in turn decreases consumption expenditure. This leads to a leftward shift of the IS curve, reflecting a decrease in overall demand at any given interest rate.

Question 3

If American college students decide that drinking Mexican-brewed beer helps one get noticed,net exports will tend to fall,causing aggregate demand to ________ and the ________ curve to shift to the left,everything else held constant.
A)fall;LM
B)fall;IS
C)rise;LM
D)rise;IS

Accepted Answer

If American college students decide to drink more Mexican-brewed beer, it will increase the demand for Mexican beer and decrease the demand for American beer. As a result, net exports will fall, leading to a decrease in aggregate demand. This will shift the IS curve to the left since a fall in net exports will reduce GDP at every level of interest rates.

Question 4

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.
A)up;rise
B)up;fall
C)down;rise
D)down;fall

Accepted Answer

A decrease in investment spending causes a leftward shift of the aggregate demand curve in the Keynesian cross diagram, leading to a lower equilibrium level of aggregate output. Option D reflects these changes.

Question 5

If young business professionals in America suddenly decide that driving German-made cars is an important status symbol,net exports will tend to ________ causing aggregate demand to ________,everything else held constant.
A)fall;fall
B)fall;rise
C)rise;fall
D)rise;rise

Accepted Answer

If young business professionals in America increase their demand for German-made cars, imports will rise, leading to a fall in net exports (exports minus imports). This decrease in net exports will cause aggregate demand to fall, assuming all other factors remain constant.

Question 6

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.
A)rise;left
B)rise;right
C)fall;left
D)fall;right

Accepted Answer

An increase in investment spending shifts the aggregate demand function up, leading to a higher equilibrium level of aggregate output and causing the IS curve to shift to the right, as it reflects higher overall spending at any given interest rate.

Question 7

An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports,everything else held constant.
A)cheaper;decline
B)cheaper;rise
C)more expensive;decline
D)more expensive;rise

Accepted Answer

When the U.S. dollar depreciates autonomously, American goods become cheaper relative to foreign goods, making them more attractive to both Americans and foreigners. This typically leads to an increase in U.S. exports and a decrease in imports, thereby increasing U.S. net exports.

Question 8

A tax cut ________ disposable income,________ consumption expenditure,and shifts the IS curve to the ________,everything else held constant.
A)increases;increases;right
B)increases;decreases;right
C)decreases;increases;left
D)decreases;decreases;left

Accepted Answer

A tax cut increases disposable income, which in turn increases consumption expenditure. This increase in aggregate demand shifts the IS curve to the right, indicating a higher level of equilibrium income at each interest rate.

Question 9

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________,everything else held constant.
A)up;rise
B)up;fall
C)down;rise
D)down;fall

Accepted Answer

An increase in investment causes the aggregate demand (AD) function to shift upward, meaning that at any given price level, the quantity of output demanded would increase to meet the new level of investment demand. As a result, the equilibrium level of aggregate output would also rise, as shown by the intersection of the new AD function and the 45-degree line in the Keynesian cross diagram.

Question 10

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to rise,and the IS curve to shift to the ________,everything else held constant.
A)up;left
B)up;right
C)down;left
D)down;right

Accepted Answer

An increase in investment spending will shift the aggregate demand function upwards, leading to an increase in the equilibrium level of aggregate output. This shift will cause the IS curve to shift to the right, as the relationship between output and interest rates will change due to the increase in investment spending.

Question 11

A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________,everything else held constant.
A)raises;LM;right
B)lowers;IS;left
C)raises;IS;right
D)lowers;LM;left

Accepted Answer

A decline in taxes increases consumer expenditure, which shifts the IS curve to the right, everything else held constant. It does not affect the LM curve. Therefore, option C is the correct answer.

Question 12

An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)rise;IS;right
C)fall;IS;left
D)fall;LM;left

Accepted Answer

An increase in government spending increases aggregate demand, which raises the equilibrium level of output at any given interest rate. This is represented by a rightward shift of the IS curve, as the IS curve shows the combinations of interest rates and levels of output where the goods market is in equilibrium.

Question 13

A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)rise;IS;right
C)fall;IS;left
D)fall;LM;left

Accepted Answer

Planned investment spending is an autonomous component that shifts the IS curve. An increase in autonomous planned investment spending shifts the IS curve to the right, increasing the equilibrium level of output. The LM curve, on the other hand, is not affected by changes in planned investment spending but by changes in the money supply, so A and D are incorrect. A fall in autonomous planned investment spending would shift the IS curve to the left and decrease the equilibrium level of output, making C incorrect.

Question 14

Everything else held constant,changes in the interest rate affect planned investment spending and hence the equilibrium level of output,but this change in investment spending
A)merely causes a movement along the IS curve and not a shift.
B)is crowded out by higher taxes.
C)is crowded out by higher government spending.
D)is crowded out by lower consumer expenditures.

Accepted Answer

Changes in the interest rate affect planned investment spending and move along the IS curve causing a shift only if there is a change in other factors like government spending or taxes. Therefore, a change in investment spending merely causes a movement along the IS curve and not a shift. The other options (B, C, D) refer to the concept of crowding out which is a separate issue related to government spending and financing.

Question 15

A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)fall;IS;left
C)fall;LM;left
D)rise;IS;right

Accepted Answer

A reduction in government spending decreases aggregate demand, leading to a fall in the equilibrium level of aggregate output. This is represented by a leftward shift of the IS (Investment-Saving) curve, as it reflects a lower level of income and output at any given interest rate.

Question 16

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________,the equilibrium level of aggregate output to fall,and the IS curve to shift to the ________,everything else held constant.
A)up;left
B)up;right
C)down;left
D)down;right

Accepted Answer

A decrease in investment spending would result in a leftward shift of the aggregate demand function in the Keynesian cross diagram. This would cause the equilibrium level of aggregate output to fall, as shown by the intersection of the new aggregate demand function and the 45-degree line. In turn, this would shift the IS curve to the left, as output (Y) is the dependent variable in the Keynesian cross model.

Question 17

A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)rise;IS;right
C)fall;IS;left
D)fall;LM;left

Accepted Answer

A decrease in autonomous consumer expenditure represents a decrease in aggregate demand, resulting in a decrease in equilibrium output. The IS curve shifts to the left because at any given interest rate, there is now less planned expenditure in the economy. The LM curve is not affected by changes in autonomous expenditure, so options A and D can be eliminated. Option B is incorrect because a rise in equilibrium output occurs when there is an increase in autonomous expenditure rather than a decrease.

Question 18

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.
A)rise;left
B)rise;right
C)fall;left
D)fall;right

Accepted Answer

A decrease in investment spending causes a decrease in the level of aggregate output. This means that the equilibrium level of aggregate output will fall. The IS curve will also shift to the left since there is now a lower level of output for any given interest rate.

Question 19

A decrease in autonomous planned investment spending,other things equal,shifts the ________ curve to the ________.
A)IS;right
B)IS;left
C)LM;left
D)LM;right

Accepted Answer

A decrease in autonomous planned investment spending would decrease overall output and decrease the demand for goods and services, shifting the IS curve to the left.

Question 20

A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)rise;IS;right
C)fall;IS;left
D)fall;LM;left

Accepted Answer

A decline in autonomous planned investment spending would shift the aggregate expenditure (AE) curve downwards, as AE = C + I + G + NX. This leads to a lower equilibrium level of output, which is the intersection of the AE curve and the 45-degree line. The IS curve shows the combinations of interest rates and output levels that equate investment with saving, but investment decreases due to the decline in autonomous planned investment spending, which shifts the IS curve to the left. The LM curve shows the combinations of interest rates and output levels that equilibrate the money market, but the decrease in investment spending has no direct effect on it. Therefore, the correct answer is C) fall; IS; left.

Quiz 20: The Is Curve

The IS curve shifts to the left when

A tax increase disposable income, consumption expenditure,and shifts the IS curve to the ,everything else held constant.

If American college students decide that drinking Mexican-brewed beer helps one get noticed,net exports will tend to fall,causing aggregate demand to and the curve to shift to the left,everything else held constant.

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift and the equilibrium level of aggregate output to ,everything else held constant.

If young business professionals in America suddenly decide that driving German-made cars is an important status symbol,net exports will tend to causing aggregate demand to ,everything else held constant.

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ,and the IS curve to shift to the ,everything else held constant.

An autonomous depreciation of the U.S. dollar makes American goods relative to foreign goods and results in a in U.S. net exports,everything else held constant.

A tax cut disposable income, consumption expenditure,and shifts the IS curve to the ,everything else held constant.

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift and the equilibrium level of aggregate output to ,everything else held constant.

In the Keynesian cross diagram,an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ,the equilibrium level of aggregate output to rise,and the IS curve to shift to the ,everything else held constant.

A decline in taxes consumer expenditure and shifts the curve to the ,everything else held constant.

An increase in government spending causes the equilibrium level of aggregate output to at any given interest rate and shifts the curve to the ,everything else held constant.

A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to and shifts the curve to the ,everything else held constant.

Everything else held constant,changes in the interest rate affect planned investment spending and hence the equilibrium level of output,but this change in investment spending

A reduction in government spending causes the equilibrium level of aggregate output to at any given interest rate and shifts the curve to the ,everything else held constant.

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ,the equilibrium level of aggregate output to fall,and the IS curve to shift to the ,everything else held constant.

A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to at any given interest rate and shifts the curve to the ,everything else held constant.

In the Keynesian cross diagram,a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down,the equilibrium level of aggregate output to ,and the IS curve to shift to the ,everything else held constant.

A decrease in autonomous planned investment spending,other things equal,shifts the curve to the .

A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to and shifts the curve to the ,everything else held constant.