Question 1

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 2

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 would shift the consumption function downward, causing a decrease in equilibrium level of aggregate output at any given interest rate. This means that the IS curve would shift to the left. The LM curve would not be affected, as it represents the equilibrium in the money market, which is determined by the interest rate.

Question 3

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 4

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

The answer of If young business professionals in America suddenly...

Question 5

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 6

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

According to the statement, a decline in taxes would increase consumer expenditure. This would shift the IS curve to the right. Therefore, option C is correct. A decrease in taxes would also lower the equilibrium interest rate, which would shift the LM curve to the right. However, we cannot determine whether the decrease in taxes would raise or lower the equilibrium level of output (i.e., GDP), so options A and D are incorrect. Option B is also incorrect because a decrease in taxes would not shift the IS curve to the left.

Question 7

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 shift in consumption expenditure results in a rightward shift of the IS curve, assuming everything else is held constant.

Question 8

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 decrease the level of aggregate output demanded, shifting the IS curve to the left. This would result in a lower equilibrium level of output. The LM curve would not be directly affected by the change in investment spending.

Question 9

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 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 ________ 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 spending will shift the aggregate demand (AD) function upward, as investment is one of the components of AD. This shift will lead to a rise in the equilibrium level of aggregate output, as the new AD curve intersects the 45-degree line at a higher level of output. This is because the higher investment spending creates a multiplier effect, where an initial increase in investment leads to a larger increase in equilibrium output, as higher output increases income, which in turn increases consumption spending, further boosting output.

Question 11

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

According to the Keynesian Cross model, an increase in autonomous planned investment spending will cause a shift in the IS curve to the right, increasing equilibrium level of aggregate output. The LM curve represents the relationship between interest rates and income, but it is not directly affected by changes in autonomous investment spending.

Question 12

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 shifts the aggregate demand curve down because it reduces total spending in the economy. This leads to a decrease in the equilibrium level of aggregate output as firms produce less in response to the lower demand.

Question 13

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 14

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 lead to a decrease in output and income. Hence, this would shift the IS curve to the left, reflecting a decrease in demand for goods and services.

Question 15

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 16

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 (AD) function up because there is an increase in the component of AD. This will lead to an increase in the equilibrium level of aggregate output because there is an increase in demand for goods and services. Additionally, the IS curve will shift to the right because at every level of interest rates, there is an increase in aggregate output. Therefore, the correct choice is B, up and right.

Question 17

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

An increase in taxes reduces disposable income and consumption, leading to lower output and a leftward shift in the IS curve.

Question 18

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 19

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 shift the entire IS curve, therefore causing a movement along the curve and not a shift. The other options (B, C, D) refer to crowding out, which is a separate phenomenon where increases in government spending, taxes, or transfer payments decrease private consumption or investment, leading to a smaller overall effect on output.

Question 20

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 shift in the aggregate demand function to the left, leading to a decrease in the equilibrium level of output. This shift also causes the IS curve to shift to the left, as the same level of output can now only be achieved at a lower interest rate.

Quiz 27: The IS Curve

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 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 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.

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.

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

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

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.

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,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 rise in autonomous planned investment spending causes the equilibrium level of aggregate output to 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 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 up,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 .

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.

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.

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.

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

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.