Question 1

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Accepted Answer

Starting from a short-run equilibrium greater than the natural rate of output, the economy experiences inflationary pressures that lead to an increase in the price level as it returns to the long-run equilibrium. Output decreases as the economy adjusts back to its potential or natural rate of output, while the price level increases due to these inflationary pressures.

Question 2

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₃ shifts to LM₂ because the money supply decreases from M₃ to M₂ then, holding other factors constant:

Accepted Answer

A decrease in the money supply shifts the LM curve to the left, resulting in a higher interest rate and lower output. This causes a leftward shift of the aggregate demand curve.

Question 3

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

Accepted Answer

An increase in the money supply would shift the LM curve to the right, as there would be more money available in the economy. This would lead to lower interest rates, which would increase investment and consumption, ultimately shifting the aggregate demand curve to the right.

Question 4

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level.

Accepted Answer

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, it implies that there is an excessive demand for goods and services in the economy, pushing up the price level. In the long run, the price level will increase further, reducing the real money supply and shifting the LM curve upward until it intersects the IS curve at the natural level of output.

Question 5

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

Accepted Answer

In the long run, if income is below the natural level of output, prices will decrease, which increases real money supply, shifting the LM curve to the right, and returning output to the natural level.

Question 6

An economic change that does not shift the aggregate demand curve is a change in:

Accepted Answer

A change in the money supply (A) would shift the aggregate demand curve as it affects overall spending in the economy, and a change in the investment function (B) would also shift the curve as it affects investment spending. Taxes (D) would also shift the curve as they affect both consumption and investment spending. However, a change in the price level (C) would not shift the aggregate demand curve as it is already incorporated into the curve - a change in the price level would result in a movement along the existing curve.

Question 7

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

Accepted Answer

A tax cut shifts the IS curve to the right, as it increases disposable income and consumption. This leads to an increase in aggregate demand, causing the aggregate demand curve to shift to the right as well. The LM curve remains unchanged as there is no direct effect of a tax cut on monetary policy.

Question 8

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

Accepted Answer

A movement along the aggregate demand curve is due to a change in the price level, while a shift in the aggregate demand curve occurs at a given price level due to factors like fiscal or monetary policy changes.

Question 9

Use the following to answer questions :
Exhibit: Short Run to Long Run 
-(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

Question 10

Use the following to answer questions :
Exhibit: Short Run to Long Run 
-(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level.

Accepted Answer

According to the graph, if the economy starts from a short-term equilibrium at D (where AD intersects SRAS), the long-run equilibrium will be at point C (where AS intersects AD) with a higher price level. This is because in the long run, prices and wages adjust to their natural levels and output returns to the potential level determined by the economy's productive capacity (shown by the LRAS curve). This causes a shift in the SRAS curve to the left, resulting in a higher price level at the new equilibrium. Therefore, choice C is the correct answer.

Question 11

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

Accepted Answer

When bond traders for the Federal Reserve seek to increase interest rates, they sell bonds, which decreases the money supply and shifts the LM curve to the left, resulting in higher interest rates.

Question 12

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

Accepted Answer

A higher price level results in a lower real money supply (M/P decreases), which raises the interest rate. Higher interest rates, in turn, reduce spending, leading to the downward slope of the aggregate demand curve.

Question 13

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

Accepted Answer

The answer of A decrease in the price level shifts...

Question 14

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Accepted Answer

Tax cuts increase disposable income, leading to an increase in consumption and investment. This is represented in the IS-LM model by shifting the IS curve to the right, as it reflects an increase in aggregate demand.

Question 15

Use the following to answer questions :
Exhibit: IS-LM to Aggregate Demand 
-(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

Accepted Answer

In the IS-LM model, a lower price level (PS) corresponds to a higher real money supply (MS), because the value of money in terms of goods and services increases. Therefore, if the price level is higher in one scenario compared to another, the real money supply must be lower in that scenario, assuming all else equal.

Question 16

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

Accepted Answer

A change in income resulting from a change in the price level is represented by a movement along the aggregate demand curve, as it reflects a change in the quantity demanded at different price levels. Conversely, a change in income in the IS-LM model for a given price level, which could result from fiscal or monetary policy, is represented by a shift in the aggregate demand curve, indicating a change in demand at all price levels.

Question 17

A change in income in the IS-LM model for a fixed price

Accepted Answer

A change in income in the IS-LM model for a fixed price represents a shift in the aggregate demand curve. This is because the IS-LM model shows the relationship between income and interest rates, and any change in income will lead to a shift in the aggregate demand curve. A movement along the aggregate demand curve would occur with a change in the price level.

Question 18

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant:

Accepted Answer

A decrease in the price level, leading to a shift in the LM curve (representing the liquidity preference and money supply relationship in the IS-LM model), indicates a movement along the aggregate demand curve rather than a shift of the curve itself. This is because the aggregate demand curve is derived from the IS-LM model by changing the price level and observing the resulting equilibrium output. A decrease in the price level makes holding money more attractive relative to bonds, decreasing interest rates (assuming money demand is a function of income and interest rates), and increasing investment and income. This is depicted as a movement down the aggregate demand curve, as lower prices increase the quantity of goods demanded.

Question 19

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

Accepted Answer

When bond traders for the Federal Reserve want to decrease interest rates, they buy bonds. This increases the demand for bonds, which in turn raises the price of bonds and decreases their yield. As a result, the LM curve (which shows the different combinations of interest rates and output levels that result in equilibrium in the money market) shifts to the right. By buying bonds, the Federal Reserve injects money into the economy, which can stimulate economic growth by making it easier for businesses and individuals to obtain credit.

Question 20

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Accepted Answer

In the IS-LM model, increasing money growth shifts the LM curve to the right, as it represents an increase in the money supply and lower interest rates. This can help stimulate spending and investment, which can help to combat an economic slowdown. Therefore, the correct answer is A, LM; right.

Quiz 12: Aggregate Demand Ii: Applying the Is-Lm Model

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₃ shifts to LM₂ because the money supply decreases from M₃ to M₂ then, holding other factors constant:

An increase in the money supply shifts the curve to the right, and the aggregate demand curve .

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the will in order to return output to the natural level.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the curve to the right and returning output to the natural level.

An economic change that does not shift the aggregate demand curve is a change in:

A tax cut shifts the to the right, and the aggregate demand curve .

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model , while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model .

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at with a _ price level.

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at with a _ price level.

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and __ spending.

A decrease in the price level shifts the curve to the right, and the aggregate demand curve .

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the curve to the .

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

A change in income in the IS-LM model resulting from a change in the price level is represented by a aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a aggregate demand curve.

A change in income in the IS-LM model for a fixed price

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant:

When bond traders for the Federal Reserve seek to decrease interest rates, they bonds, which shifts the curve to the right.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .

Quiz 12: Aggregate Demand Ii: Applying the Is-Lm Model

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant:

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

An economic change that does not shift the aggregate demand curve is a change in:

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

A change in income in the IS-LM model for a fixed price

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₃ shifts to LM₂ because the money supply decreases from M₃ to M₂ then, holding other factors constant:

An increase in the money supply shifts the curve to the right, and the aggregate demand curve .

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the will in order to return output to the natural level.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the curve to the right and returning output to the natural level.

A tax cut shifts the to the right, and the aggregate demand curve .

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model , while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model .

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at with a _ price level.

Use the following to answer questions : Exhibit: Short Run to Long Run -(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at with a _ price level.

When bond traders for the Federal Reserve seek to increase interest rates, they bonds, which shifts the curve to the left.

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a real money supply M/P, which the interest rate and __ spending.

A decrease in the price level shifts the curve to the right, and the aggregate demand curve .

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the curve to the .

A change in income in the IS-LM model resulting from a change in the price level is represented by a aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a aggregate demand curve.

Use the following to answer questions : Exhibit: IS-LM to Aggregate Demand -(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM₁ shifts to LM₂ because the price level decreases from P₁ to P₂ then, holding other factors constant:

When bond traders for the Federal Reserve seek to decrease interest rates, they bonds, which shifts the curve to the right.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the curve to the .