Question 1

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output.
A) vertical; fiscal
B) horizontal; fiscal
C) vertical; monetary
D) horizontal; monetary

Accepted Answer

When the LM curve is horizontal, it indicates that changes in monetary policy (such as changes in the money supply) have no effect on output because the interest rate is fixed at r*.

Question 2

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.
A) monetary; high
B) monetary; low
C) fiscal; high
D) fiscal; low

Accepted Answer

A liquidity trap occurs when interest rates are low and savings rates are high, rendering monetary policy ineffective in stimulating economic growth.

Question 3

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.
A) large; small.
B) small; also small.
C) small; large.
D) large; also large.

Accepted Answer

When d is large, any change in interest rates will have a larger effect on investment demand, leading to a greater change in aggregate demand. When f is small, changes in the money supply will have a larger effect on the quantity of real money demanded, also leading to a greater change in aggregate demand. Therefore, monetary policy will be relatively potent in influencing aggregate demand when d is large and f is small.

Question 4

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.
A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal

Accepted Answer

The IS curve is vertical when investment and consumption are independent of the interest rate, meaning changes in the interest rate (a tool of monetary policy) do not affect output.

Question 5

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:
A) larger the level of government spending.
B) smaller the level of government spending.
C) greater the sensitivity of investment spending to the interest rate.
D) smaller the sensitivity of investment spending to the interest rate.

Accepted Answer

The IS curve will be steeper when there is a smaller sensitivity of investment spending to the interest rate. This is because a smaller sensitivity means that changes in the interest rate have a less significant impact on investment spending, leading to smaller shifts in the curve for a given change in interest rates.

Question 6

Most economists believe:
A) the Great Depression is very likely to be repeated.
B) it is likely that the money supply might again fall by one-fourth, but that fiscal policy would be expansionary enough in this case to avoid a Great Depression.
C) it is unlikely that the money supply might fall again by one-fourth, but it is likely that fiscal policy might be so contractionary as to cause a Great Depression.
D) in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

Accepted Answer

Most economists believe that a repeat of the Great Depression is unlikely due to the knowledge and implementation of monetary and fiscal policy, as well as institutional changes. The global economy has also evolved significantly since the 1930s, making a repeat of the Great Depression less likely.

Question 7

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:
A) left by 100.
B) left by 200.
C) right by 100.
D) right by 200.

Accepted Answer

The answer of If the demand function for money is...

Question 8

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:
A) high inflation.
B) low interest rates.
C) stock market volatility.
D) falling house prices.

Accepted Answer

High inflation was not a significant factor in the financial crisis and economic downturn of 2008-2009. Rather, it was a combination of factors such as low interest rates, stock market volatility, and falling house prices that led to the crisis. High inflation would have actually been helpful in alleviating some of the debt burden and supporting economic growth.

Question 9

A liquidity trap occurs when:
A) banks have too much currency and close their doors to new customers.
B) the central bank mistakenly prints too much money, generating hyperinflation.
C) interest rates fall so low that monetary policy is no longer effective.
D) dams and locks are built to prevent flooding.

Accepted Answer

A liquidity trap occurs when interest rates fall so low that monetary policy is no longer effective. When interest rates are already near zero, further decreases will not stimulate borrowing and investment. This is because people and businesses may hold onto their money instead of lending or investing it, in hopes of even lower interest rates in the future. This stagnant economic activity can lead to deflation and a lack of economic growth.

Question 10

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output.
A) horizontal; fiscal
B) vertical; fiscal
C) horizontal; monetary
D) vertical; monetary

Accepted Answer

The answer of If money demand does not depend on...

Question 11

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.
A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal

Accepted Answer

The answer of If investment demand is infinite below some...

Question 12

Other things equal, a given change in money supply has a larger effect on demand the:
A) larger the income sensitivity of money demand.
B) smaller the income sensitivity of money demand.
C) flatter the LM curve.
D) steeper the IS curve.

Accepted Answer

A smaller income sensitivity of money demand means that changes in income have a smaller effect on the demand for money, resulting in a larger effect of a given change in money supply on demand.

Question 13

Other things equal, a given change in money supply has a larger effect on demand the:
A) flatter the IS curve.
B) steeper the IS curve.
C) smaller the interest sensitivity of expenditure demand.
D) larger the income sensitivity of money demand.

Accepted Answer

A flatter IS curve indicates that changes in the interest rate have a larger effect on output, meaning that a change in the money supply will have a larger impact on demand.

Question 14

Other things equal, a given change in government spending has a larger effect on demand the:
A) flatter the IS curve.
B) steeper the IS curve.
C) larger the interest sensitivity of expenditure demand.
D) smaller the interest sensitivity of money demand.

Accepted Answer

The steeper the IS curve, the more responsive expenditures are to changes in interest rates. This means that a given change in government spending will have a larger effect on demand when the IS curve is steeper.

Question 15

Other things equal, a given change in government spending has a larger effect on demand the:
A) flatter the LM curve.
B) steeper the LM curve.
C) smaller the interest sensitivity of money demand.
D) larger the income sensitivity of money demand.

Accepted Answer

A flatter LM curve indicates that the interest rate is less sensitive to changes in income, meaning that fiscal policy (like government spending) will have a larger effect on demand because it won't be offset as much by changes in interest rates.

Question 16

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.
A) 4
B) 1
C) 0
D) -2

Accepted Answer

The real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. Therefore, the real interest rate would be -2 percent [(1 percent) - (3 percent) = -2 percent]. This means that the borrower would effectively be paying back less in real terms than they borrowed, while the lender would earn less in real terms than they loaned.

Question 17

A given increase in taxes shifts the IS curve more to the left the:
A) larger the marginal propensity to consume.
B) smaller the marginal propensity to consume.
C) larger the government spending.
D) smaller the government spending.

Accepted Answer

A larger marginal propensity to consume means that consumers are more likely to spend additional income, so a tax increase (which reduces disposable income) would lead to a larger decrease in consumption and a more significant shift of the IS curve to the left.

Question 18

The slope of the IS curve depends on:
A) the interest sensitivity of investment and the amount of government spending.
B) the interest sensitivity of investment and the marginal propensity to consume.
C) the interest sensitivity of investment and the tax rates.
D) tax rates and government spending.

Accepted Answer

The slope of the IS curve depends on the interest sensitivity of investment and the marginal propensity to consume because these factors determine how changes in interest rates affect investment and consumption, which in turn influence aggregate demand and output.

Question 19

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.
A) large; small
B) small; small
C) small; large
D) large; large

Accepted Answer

Fiscal policy is more effective when investment is less sensitive to interest rates (small d) and money demand is more sensitive to interest rates (large f), as this reduces crowding out effects.

Question 20

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.
A) greater; greater
B) greater; smaller
C) smaller; smaller
D) smaller; greater

Accepted Answer

The LM curve is steeper the smaller the interest sensitivity of money demand (meaning people's demand for money is less responsive to changes in interest rates) and the greater the effect of income on money demand (meaning as income increases, the demand for money increases significantly). This combination makes the LM curve steeper because a small increase in income leads to a large increase in the demand for money, which requires a significant increase in interest rates to restore equilibrium in the money market.

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

If money demand is infinite below some certain r (e.g., r) and zero above r, then the LM curve is and policy has no effect on output.

If a liquidity trap does exist, then policy will not be effective in increasing income when interest rates reach very levels.

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is and f is .

If neither investment nor consumption depends on the interest rate, then the IS curve is and policy has no effect on output.

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

Most economists believe:

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

A liquidity trap occurs when:

If money demand does not depend on the interest rate, then the LM curve is and policy has no effect on output.

If investment demand is infinite below some certain r (e.g., r) and zero above r, then the IS curve is and policy has no effect on output.

Other things equal, a given change in money supply has a larger effect on demand the:

Other things equal, a given change in money supply has a larger effect on demand the:

Other things equal, a given change in government spending has a larger effect on demand the:

Other things equal, a given change in government spending has a larger effect on demand the:

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

A given increase in taxes shifts the IS curve more to the left the:

The slope of the IS curve depends on:

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is and f is .

The LM curve is steeper the the interest sensitivity of money demand and the the effect of income on money demand.