Question 1

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to fall.
A)right;supply
B)right;demand
C)left;supply
D)left;demand

Accepted Answer

C

Question 2

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.
A)IS curve
B)LM curve
C)consumption function
D)investment schedule

Accepted Answer

The LM curve shows the combinations of interest rates and aggregate output where the demand for money equals the supply of money. It represents the equilibrium in the money market, where the interest rate adjusts to balance the demand and supply of money. The IS curve shows the equilibrium in the goods market, while the consumption function and investment schedule relate to the factors that determine the level of consumption and investment in the economy, respectively.

Question 3

In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.
A)positively;positively
B)positively;negatively
C)negatively;negatively
D)negatively;positively

Accepted Answer

In the Keynesian model, the quantity of money demanded increases with income (indicating a positive relationship) and decreases as the interest rate rises (indicating a negative relationship). This is because higher income increases transactions demand for money, while higher interest rates make holding money less attractive compared to interest-bearing assets.

Question 4

As aggregate output rises,the demand for money ________ and the interest rate ________,so that money demanded equals money supplied and the money market is in equilibrium.
A)increases;rises
B)increases;falls
C)decreases;rises
D)decreases;falls

Accepted Answer

As aggregate output rises, the demand for money increases because more transactions are taking place, requiring more money to facilitate these transactions. As the demand for money increases, the interest rate rises to balance the money market by equating the quantity of money demanded with the quantity of money supplied. Higher interest rates make holding money more expensive, which helps bring the demand for money back in line with the supply.

Question 5

According to the liquidity preference theory,the demand for money is ________ related to aggregate output and ________ related to interest rates.
A)negatively;negatively
B)negatively;positively
C)positively;negatively
D)positively;positively

Accepted Answer

According to the liquidity preference theory, the demand for money is positively related to aggregate output (as output increases, the demand for transactions requiring money increases) and negatively related to interest rates (as higher interest rates make holding money less attractive compared to interest-bearing assets).

Question 6

Because inflation was not a serious problem during the Great Depression,Keynes's analysis assumed
A)that unemployment also was not a problem.
B)that the money supply was fixed.
C)that the price level was fixed.
D)that monetary policy is not effective.

Accepted Answer

Keynes assumed that the price level was fixed, which means that inflation was not a concern during the Great Depression. This allowed him to focus on the problem of unemployment and develop his theory of how government intervention could help stimulate demand and increase employment.

Question 7

As interest rates rise,the opportunity cost of holding money ________ and the demand for money ________.
A)rises;rises
B)rises;falls
C)falls;rises
D)falls;falls

Accepted Answer

As interest rates increase, holding money becomes more expensive since the opportunity cost of not investing the money in interest-bearing assets increases. Therefore, people tend to hold less money and demand for money falls.

Question 8

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.
A)supply;fall
B)supply;rise
C)demand;fall
D)demand;rise

Accepted Answer

When aggregate output is to the left of the LM curve, it means that the quantity of money demanded exceeds the quantity of money supplied at the prevailing interest rate. This creates an excess demand for money, which will cause the interest rate to fall. As the interest rate falls, it will encourage investment and consumption, leading to an increase in aggregate output and a shift along the LM curve.

Question 9

Everything else held constant,if aggregate output is to the right of the LM curve,then there is an excess ________ of money which will cause the interest rate to ________.
A)supply;fall
B)supply;rise
C)demand;fall
D)demand;rise

Accepted Answer

When aggregate output is to the right of the LM curve, there is an excess demand for money, which causes the interest rate to rise as people sell bonds to obtain money, driving bond prices down and interest rates up.

Question 10

If the economy is on the LM curve,but is to the right of the IS curve,aggregate output will ________ and the interest rate will ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Accepted Answer

The answer of If the economy is on the LM...

Question 11

Macroeconomic equilibrium requires
A)equilibrium in the goods market.
B)equilibrium in the money market.
C)equilibrium in both the goods and money markets.
D)equilibrium in neither the goods nor the money market.

Accepted Answer

Macroeconomic equilibrium requires both equilibrium in the goods market and equilibrium in the money market. In the goods market, the quantity of goods supplied equals the quantity of goods demanded, while in the money market, the quantity of money supplied equals the quantity of money demanded. Both of these markets must be in equilibrium for the macroeconomy to be in equilibrium. Therefore, the correct answer is C, equilibrium in both the goods and money markets. A and B only represent partial equilibrium, while D is not a feasible possibility for macroeconomic equilibrium.

Question 12

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess supply of money which will cause the interest rate to ________.
A)right;fall
B)right;rise
C)left;fall
D)left;rise

Accepted Answer

When aggregate output is to the left of the LM curve, there is an excess supply of money, leading to a decrease in interest rates.

Question 13

If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will ________ and the interest rate will ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Accepted Answer

When the economy is on the IS curve but to the right of the LM curve, it indicates that the interest rate is higher than the equilibrium rate for the current level of output, leading to a decrease in investment and aggregate output. Consequently, to restore equilibrium, the interest rate will rise to decrease investment demand and bring the economy back to the intersection of the IS and LM curves.

Question 14

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess demand of money which will cause the interest rate to ________.
A)right;fall
B)right;rise
C)left;fall
D)left;rise

Accepted Answer

According to the liquidity preference theory of interest rate determination, if aggregate output is to the right of the LM curve, then the equilibrium interest rate is lower than the prevailing interest rate. This implies that there will be excess demand for money, which will cause people to sell their securities to buy money in order to satisfy their demand for money. As a result, the equilibrium interest rate will rise until the excess demand for money is eliminated. Therefore, the correct answer is B) right; rise.

Question 15

The money market is in equilibrium
A)at any point on the IS curve.
B)at any point on the LM curve.
C)at only one point on the LM curve.
D)only at the intersection of the IS and LM curves.

Accepted Answer

The money market is in equilibrium at any point on the LM curve, as the LM curve represents all combinations of interest rates and levels of income at which the demand for money equals the supply of money.

Question 16

When the IS and LM curves are combined in the same diagram,the intersection of the two curves determines the equilibrium level of ________ as well as the ________.
A)aggregate output;price level
B)aggregate output;interest rate
C)money supply;price level
D)consumer expenditures;interest rate

Accepted Answer

The intersection of the IS and LM curves determines the equilibrium level of aggregate output and the interest rate. The IS curve represents the equilibrium in the goods market while the LM curve represents the equilibrium in the money market. The point where they intersect represents the level of output where the demand for goods and the demand for money are equal, which in turn determines the interest rate. Therefore, choice B is the correct answer.

Question 17

Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess ________ of money which will cause the interest rate to rise.
A)right;supply
B)right;demand
C)left;supply
D)left;demand

Accepted Answer

If aggregate output is to the right of the LM (Liquidity-Money) curve, it means that there is excess demand for money. As a result, the interest rate will increase to balance the supply and demand of money. Therefore, choice B (right; demand) is the correct answer.

Question 18

If the economy is on the IS curve,but is to the left of the LM curve,aggregate output will ________ and the interest rate will ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Accepted Answer

When the economy is on the IS curve but to the left of the LM curve, it indicates that the interest rate is higher than the equilibrium rate for the current level of income, leading to an excess demand for money. To restore equilibrium, the interest rate will fall, encouraging investment and increasing aggregate output.

Question 19

If the economy is on the LM curve,but is to the left of the IS curve,aggregate output will ________ and the interest rate will ________.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Accepted Answer

The answer of If the economy is on the LM...

Question 20

If the economy is on the IS curve,but is to the left of the LM curve,then the ________ market is in equilibrium,but the interest rate is ________ the equilibrium level.
A)goods;below
B)goods;above
C)money;below
D)money;above

Accepted Answer

The answer of If the economy is on the IS...

Quiz 27: The ISLM Model

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess of money which will cause the interest rate to fall.

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

In the Keynesian model the quantity of money demanded is related to income and related to the interest rate.

As aggregate output rises,the demand for money and the interest rate ,so that money demanded equals money supplied and the money market is in equilibrium.

According to the liquidity preference theory,the demand for money is related to aggregate output and related to interest rates.

Because inflation was not a serious problem during the Great Depression,Keynes's analysis assumed

As interest rates rise,the opportunity cost of holding money and the demand for money .

Everything else held constant,if aggregate output is to the left of the LM curve,then there is an excess of money which will cause the interest rate to .

Everything else held constant,if aggregate output is to the right of the LM curve,then there is an excess of money which will cause the interest rate to .

If the economy is on the LM curve,but is to the right of the IS curve,aggregate output will and the interest rate will .

Macroeconomic equilibrium requires

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess supply of money which will cause the interest rate to .

If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will and the interest rate will .

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess demand of money which will cause the interest rate to .

The money market is in equilibrium

When the IS and LM curves are combined in the same diagram,the intersection of the two curves determines the equilibrium level of as well as the .

Everything else held constant,if aggregate output is to the of the LM curve,then there is an excess of money which will cause the interest rate to rise.

If the economy is on the IS curve,but is to the left of the LM curve,aggregate output will and the interest rate will .

If the economy is on the LM curve,but is to the left of the IS curve,aggregate output will and the interest rate will .

If the economy is on the IS curve,but is to the left of the LM curve,then the market is in equilibrium,but the interest rate is the equilibrium level.