Question 1

Suppose that North Korea has closed off its capital market from the rest of the world.No resident is allowed to invest outside North Korea and no foreigner is allowed to invest in North Korea's capital market.In this case,the BP curve will be:
A) upward-sloping curve
B) downward-sloping curve
C) horizontal curve
D) vertical curve

Accepted Answer

In this scenario, the capital market of North Korea is completely closed off from the rest of the world. As a result, the supply and demand for loanable funds in the country will be completely independent of the world interest rate. This means that the BP curve will be vertical, indicating that the quantity of loanable funds demanded and supplied in North Korea will not change in response to changes in the world interest rate.

Question 2

The IS curve represents the __________,while the LM curve represents the _________.
A) foreign exchange market; money market
B) foreign exchange market; bond market
C) goods and services market; foreign exchange market
D) goods and services market; money market

Accepted Answer

The IS curve represents the equilibrium points of the goods and services market, where investment equals savings. It shows the relationship between real interest rates and the level of output in the economy. On the other hand, the LM curve represents the equilibrium points of the money market, where the demand for money equals the supply of money. It shows the relationship between real interest rates and the level of income in the economy.

Question 3

With floating exchange rates,a country can use _______ to alter domestic income.
A) Fiscal policy
B) Monetary policy
C) Currency devaluations
D) Currency appreciation

Accepted Answer

B

Question 4

A change in the riskiness of country's assets shifts the:
A) IS curve
B) LM curve
C) BP curve
D) None of the above

Accepted Answer

A change in riskiness of assets in a country will affect its balance of payments (BP), which represents the demand and supply of a country's currency in the foreign exchange market. If the assets become riskier, there may be a decrease in demand for the country's currency, and the BP curve will shift. Changes in riskiness of assets do not directly affect the IS or LM curves, which relate to domestic output and interest rates.

Question 5

When the leakages are ________ the injections,then the value of income received from producing goods and services will equal to total spending.
A) Greater than
B) Less than
C) Equal to
D) The sum of

Accepted Answer

When leakages (savings, taxes, and imports) equal injections (investment, government spending, and exports), the value of income received from producing goods and services will equal total spending, resulting in a stable economy. Therefore, the correct option is equal to.

Question 6

Which of the following factors shifts the LM curve to the left?
A) An increase in money supply
B) An decrease in money supply
C) An increase in government spending
D) A depreciation of domestic currency

Accepted Answer

A decrease in money supply will make the interest rates rise, resulting in a decrease in investment and a decrease in output. This will lead to a shift in the LM curve to the left. An increase in money supply will lower interest rates, leading to an increase in investment and output, resulting in a rightward shift in the LM curve. Options C and D will shift the IS curve and not the LM curve.

Question 7

A change in fiscal policy shifts the:
A) IS curve
B) LM curve
C) BP curve
D) None of the above

Accepted Answer

A change in fiscal policy (e.g. government spending or taxation) affects the level of national income and therefore shifts the IS (investment-saving) curve in the IS-LM model of the economy. A change in monetary policy (e.g. interest rates) affects the money supply and the interest rate, and therefore shifts the LM (liquidity preference-money supply) curve. The BP (balance of payments) curve is not directly affected by fiscal or monetary policy, but rather by the exchange rate and other external factors.

Question 8

Typically,the LM curve is:
A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping

Accepted Answer

The LM curve is upward-sloping because it represents the relationship between the interest rate and the level of income that equates the demand for and supply of money. As income increases, the demand for money increases, leading to higher interest rates if the supply of money is held constant.

Question 9

If the Fed decreases money supply,
A) the IS curve will shift to the right.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the LM curve will shift to the left.

Accepted Answer

When the Fed decreases money supply, it becomes more expensive for banks to borrow money from the Fed, which in turn causes interest rates to increase. This causes a decrease in investment and consumption, shifting the IS curve to the left. Additionally, with higher interest rates, people are less willing to hold money, which causes a decrease in the demand for money and a leftward shift of the LM curve. Therefore, the correct choice is D as the LM curve will shift to the left.

Question 10

Which of the following is not one of the three equilibrium conditions in an IS-LM-BP model?
A) Goods market equilibrium
B) Balance of payments equilibrium
C) Currency equilibrium
D) Money market equilibrium

Accepted Answer

The three equilibrium conditions in an IS-LM-BP model are goods market equilibrium, money market equilibrium, and balance of payments equilibrium. Currency equilibrium is not a term used in this model.

Question 11

The following curves represent an equilibrium in which markets? Match the curves with the type of equilibrium.
I.Money market equilibrium
II.Balance of payments equilibrium
III.Goods market equilibrium
A) IS, BP, LM
B) LM, BP, IS
C) BP, IS, LM
D) LM, IS, BP

Accepted Answer

The answer of The following curves represent an equilibrium in...

Question 12

Typically,the IS curve is:
A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping

Accepted Answer

The IS curve represents the relationship between interest rates and output in the goods market. As interest rates increase, investment decreases which leads to a decrease in output (i.e. a contraction of the economy). Therefore, the IS curve is downward-sloping, showing that as interest rates decrease, output increases.

Question 13

Under fixed exchange rates,when a central bank increases money supply,it first shifts the LM curve to the ______ and later shifts ______.
A) left; the LM curve to the right.
B) left; the IS curve to the right.
C) right; the LM curve to the left.
D) right; the IS curve to the right.

Accepted Answer

Under fixed exchange rates, an increase in money supply by the central bank shifts the LM curve to the right, which leads to an increase in output and a decrease in interest rates. If the central bank wants to maintain the fixed exchange rate, it has to intervene in the foreign exchange market by buying up foreign currencies, which shifts the LM curve back to the left. Therefore, the correct answer is C.

Question 14

A change in the monetary policy shifts the:
A) IS curve
B) LM curve
C) BP curve
D) None of the above

Accepted Answer

A change in the monetary policy will affect the LM curve, which shows the combinations of interest rates and output levels that result in equilibrium in the money market. When the central bank adjusts the money supply, it will affect the interest rate and hence the position of the LM curve in the output-interest rate space. The IS curve shows the combinations of interest rates and output levels that result in equilibrium in the goods market, while the BP curve shows the combinations of interest rates and output levels that result in equilibrium in the balance of payments. However, a change in the monetary policy does not directly affect these curves.

Question 15

Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,if a country experiences less than perfect capital mobility,the BP curve has a shape like: A) BP_A B) BP_B C) BP_C D) BP_D

Accepted Answer

The answer of Use this graph to answer questions 21...

Question 16

With flexible exchange rates,a decrease in money supply by a central bank causes the domestic interest rate to _______ ,official settlements _______,and the domestic currency to _______.As a result,the IS curve will shift to bring the domestic interest rate to be equal to foreign interest rates.
A) fall; deficit; depreciate
B) rise; deficit; depreciate
C) rise; surplus; appreciate
D) fall; surplus; appreciate

Accepted Answer

A decrease in the money supply by a central bank causes the domestic interest rate to rise, leading to a capital inflow (or reduced capital outflow), which results in an official settlements surplus. The higher interest rate makes the domestic currency more attractive, causing it to appreciate. This appreciation, in turn, affects the IS curve by shifting it to adjust the domestic interest rate towards equilibrium with foreign interest rates.

Question 17

The ________ represents all the points where money supplied is equal to money demanded.
A) IS curve
B) LM curve
C) BP curve
D) None of the above

Accepted Answer

The LM curve represents the equilibrium of the money market, where money supplied (as determined by the central bank) is equal to money demanded (by individuals and firms). The IS curve represents the equilibrium of the goods market and the BP curve represents the equilibrium of the balance of payments.

Question 18

With fixed exchange rates,a country cannot conduct ________ to alter domestic income.
A) Fiscal policy
B) Monetary policy
C) Currency devaluations
D) Currency appreciation

Accepted Answer

With fixed exchange rates, a country's ability to use monetary policy as a tool to influence domestic income is significantly limited. This is because the central bank must focus on maintaining the fixed exchange rate, often by adjusting interest rates to control money flow, which restricts its ability to use monetary policy for domestic economic stabilization.

Question 19

Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,which of the following is correct about the BP_C horizontal curve? A) It assumes perfect capital mobility. B) It assumes perfect substitutability between domestic and foreign assets. C) It represents equilibria in the balance of payment. D) All of the above are correct.

Accepted Answer

The BP_C horizontal curve represents conditions under which the balance of payments is in equilibrium, assuming perfect capital mobility and perfect substitutability between domestic and foreign assets.

Question 20

If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _____ in the value of the country's currency,which will tend to _____ national income.
A) a depreciation; increase
B) a depreciation; decrease
C) an appreciation; increase
D) an appreciation; decrease

Accepted Answer

When a country with a flexible exchange rate decreases its money supply, it will lead to an appreciation in the value of the country's currency. This is because with less money in circulation, each unit of currency becomes more valuable. However, this appreciation will tend to decrease national income, as it makes exports more expensive and reduces demand for the country's goods and services in the international market.

Quiz 13: The Is-Lm-Bp Approach

Suppose that North Korea has closed off its capital market from the rest of the world.No resident is allowed to invest outside North Korea and no foreigner is allowed to invest in North Korea's capital market.In this case,the BP curve will be:

The IS curve represents the __,while the LM curve represents the _.

With floating exchange rates,a country can use _______ to alter domestic income.

A change in the riskiness of country's assets shifts the:

When the leakages are ________ the injections,then the value of income received from producing goods and services will equal to total spending.

Which of the following factors shifts the LM curve to the left?

A change in fiscal policy shifts the:

Typically,the LM curve is:

If the Fed decreases money supply,

Which of the following is not one of the three equilibrium conditions in an IS-LM-BP model?

The following curves represent an equilibrium in which markets? Match the curves with the type of equilibrium. I.Money market equilibrium II.Balance of payments equilibrium III.Goods market equilibrium

Typically,the IS curve is:

Under fixed exchange rates,when a central bank increases money supply,it first shifts the LM curve to the and later shifts .

A change in the monetary policy shifts the:

Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,if a country experiences less than perfect capital mobility,the BP curve has a shape like:

With flexible exchange rates,a decrease in money supply by a central bank causes the domestic interest rate to ___ ,official settlements _,and the domestic currency to _____.As a result,the IS curve will shift to bring the domestic interest rate to be equal to foreign interest rates.

The ________ represents all the points where money supplied is equal to money demanded.

With fixed exchange rates,a country cannot conduct ________ to alter domestic income.

Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,which of the following is correct about the BP_C horizontal curve?

If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _ in the value of the country's currency,which will tend to _ national income.