Question 1

The IS and LM curves together generally determine:
A) income only.
B) the interest rate only.
C) both income and the interest rate.
D) income, the interest rate, and the price level.

Accepted Answer

The IS curve represents the combinations of income and interest rates that lead to equilibrium in the goods market (where aggregate expenditure equals output) and the LM curve represents the combinations of income and interest rates that lead to equilibrium in the money market (where money demand equals money supply). Together, these curves determine both equilibrium income (output) and equilibrium interest rate in the economy. Therefore, the correct answer is C) both income and the interest rate.

Question 2

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.
A) raises
B) lowers
C) does not change
D) may either raise or lower

Accepted Answer

According to the quantity theory of money, an increase in the nominal money supply leads to an increase in the price level, which in turn leads to an increase in the level of income that is consistent with equilibrium in the market for real balances. Therefore, an increase in the nominal money supply raises the level of income that is consistent with equilibrium.

Question 3

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent. A) 2 B) 4 C) 6 D) 8

Accepted Answer

Firstly, we substitute the given values in the money demand function to get: (2000/2)^d = 2,200 - 200r => 1000^d = 2,200 - 200r => ^d = 2.2 - 0.2r Next, we equate the money supply to money demand to get the equilibrium interest rate: M/P = (M/P)^d => 2000/2 = (1000^d)(2) => 1000^d = 1000 => ^d = 1 Substituting this value in ^d = 2.2 - 0.2r, we get: 1 = 2.2 - 0.2r => 0.2r = 1.2 => r = 6 Therefore, the equilibrium interest rate is 6 percent.

Question 4

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.

Accepted Answer

To fix the interest rate at 7 percent, we need to equate the money demand function to the money supply and solve for the interest rate.

2,200 - 200r = 2,000/2*7

2,200 - 200r = 143.6

200r = 2,056.4

r = 10.282%

The interest rate that results from the given money supply is higher than the desired interest rate of 7 percent. To bring the interest rate down to 7 percent, the Fed needs to increase the money supply.

We can rearrange the money demand function to solve for the money supply:

M = (2,200 - 200r) * P / U1 * P1 * S1 * S1

M = (2,200 - 200 * 7) * 2 / 1 * 1 * 1 * 1

M = 1,600

Therefore, the Fed should set the money supply at 1,600 to fix the interest rate at 7 percent.

Question 5

The interest rate determines ______ in the goods market and money ______ in the money market.
A) government spending; demand
B) government spending; supply
C) investment spending; demand
D) investment spending; supply

Accepted Answer

The interest rate affects investment spending in the goods market, which in turn affects the demand for money in the money market. As interest rates rise, the cost of borrowing increases, which may lead to a decrease in investment spending and therefore a decrease in demand for money. Conversely, as interest rates fall, the cost of borrowing decreases, which may lead to an increase in investment spending and therefore an increase in demand for money. Therefore, the interest rate determines investment spending and its related demand for money in the money market.

Question 6

For any given interest rate and price level, an increase in the money supply:
A) lowers income.
B) raises income.
C) has no effect on income.
D) lowers velocity.

Accepted Answer

According to the Quantity Theory of Money, an increase in the money supply leads to an increase in aggregate demand, which leads to an increase in real GDP and therefore income. So, an increase in the money supply raises income.

Question 7

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2/3(Y - T). Planned investment is 300, as are government spending and taxes.

a. If $Y$ is 1,500 , what is planned spending? What is inventory accumulati on or decumulation? Should equilibrium $Y$ be higher or lower than 1,500 ?
b. What is equilibrium $Y$ ? (Hint: Substitute the values of equations for planned consumption, investment, and government spending into the equation $Y = C + I + G$ and then solve for $Y$.)
c. What are equilibrium consumption, private saving, public saving, and national saving?
d. How much does equilibrium income decrease when $G$ is reduced to 200 ? What is the multiplier for government spending?

Accepted Answer

The answer of Consider a closed economy to which the...

Question 8

The LM curve generally determines:
A) income.
B) the interest rate.
C) both income and the interest rate.
D) neither income nor the interest rate.

Accepted Answer

The answer of The LM curve generally determines:
A) income.
B) the...

Question 9

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.

Accepted Answer

We can start by using the quantity theory of money equation: M × V = P × Y Where M is the money supply, V is the velocity of money (assumed constant), P is the price level, and Y is real output. Assuming Y is fixed, we can rewrite the equation as: (M/P)d = 1/V Where d is the demand for money in real terms (i.e. (M/P)^d / P) and 1/V is the supply of real balances. Substituting the given values: d = (2,200 - 200r)/2 = 1,100 - 100r M/P = 2,000/2 = 1,000 d/M = (1,100 - 100r)/1,000 We can solve for the equilibrium interest rate by setting the supply of real balances equal to the demand for real balances: (2,800/2)d/2,800 = (2,000/2)d/2,000 1 - r/+ (Δd)/(d) = (M /+ (ΔM)) / P Simplifying: (1,100 - 100r)/1,400 = 1,100/1,000 r = 3 So the equilibrium interest rate drops by 2 percent (from 5 percent to 3 percent) when the money supply increases from 2,000 to 2,800, assuming the price level is fixed. Therefore, the correct answer is B.

Question 10

The intersection of the IS and LM curve determines the values of:
A) r, Y, and P, given G, T, and M.
B) r, Y, and M, given G, T, and P.
C) r and Y, given G, T, M, and P.
D) p and Y, given G, T, and M.

Accepted Answer

The IS-LM model shows the equilibrium in the goods and money markets. The intersection of the IS and LM curves determines the equilibrium values of r (interest rate) and Y (income/output) given G (government spending), T (taxes), M (money supply), and P (price level). Therefore, the correct option is C, which states that the intersection of the IS and LM curve determines the values of r and Y, given G, T, M, and P. P is not determined by the intersection of the IS and LM curves.

Question 11

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:
A) not change.
B) be smaller.
C) be bigger.
D) be equal to 1.

Accepted Answer

When taxes are made a function of income (T = T + tY), the marginal propensity to consume out of disposable income decreases because a portion of any additional income is taxed away. This results in a smaller multiplier for government purchases compared to a case where t (the marginal tax rate) is zero, because less of each dollar of government spending translates into consumer spending.

Question 12

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:
A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier.
B) lower equilibrium income by the decrease in the intercept.
C) raise equilibrium income by the decrease in the intercept.
D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Accepted Answer

In the Keynesian-cross analysis, an increase in thriftiness, represented by a decrease in the intercept of the consumption function, means that at every level of income, consumption is lower and saving is higher. This decrease in consumption reduces aggregate demand, leading to a lower equilibrium income. The effect on equilibrium income is amplified by the multiplier, which is determined by the marginal propensity to consume (which remains unchanged in this scenario). Therefore, the equilibrium income is lowered by the decrease in the intercept multiplied by the multiplier.

Question 13

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.
A) saving and investment; planned spending
B) real-money balances; loanable funds
C) goods and services; real money balances
D) real-money balances; goods and services

Accepted Answer

The IS curve represents equilibrium in the goods and services market, where investment equals saving, while the LM curve represents equilibrium in the money market, where demand for and supply of real money balances are equal.

Question 14

An increase in income raises money ______ and ______ the equilibrium interest rate.
A) demand; raises
B) demand; lowers
C) supply; raises
D) supply; lowers

Accepted Answer

An increase in income raises money demand because people have more money to spend. Additionally, this increase in demand for money leads to an increase in the equilibrium interest rate as people are willing to pay more to borrow money.

Question 15

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:
A) increase saving by the decrease in the intercept.
B) lead to no change in saving.
C) decrease saving by the decrease in the intercept.
D) lead to an increase in investment.

Accepted Answer

An increase in thriftiness in the Keynesian-cross analysis, characterized by a decrease in the intercept of the consumption function, directly increases saving by the amount of the decrease in the intercept. This is because, at every level of income, individuals are choosing to save more and consume less, leading to an increase in saving by the decrease in the intercept.

Question 16

Changes in monetary policy shift the:
A) LM curve.
B) planned spending curve.
C) money demand curve.
D) IS curve.

Accepted Answer

Changes in monetary policy, such as altering the money supply or interest rates, directly affect the LM curve, which represents the relationship between the interest rate and the level of income that equates the money supply with money demand.

Question 17

Assume that the consumption function is given by C = 200 + 0.5(Y - T) and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.

a. What is the numerical formula for the $I S$ curve? (Hint: Substitute for $C , I$, and $G$ in the equation $Y = C + I + G$ and then write an equation for $Y$ as a function of $r$ or $r$ as a function of $Y$.) Express the equation two ways.
b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of $Y$ when the IS curve is written expressing $r$ as a function of $Y$.)
c. If $r$ is one percent, what is $I$ ? What is $Y$ ? If $r$ is 3 percent, what is $I$ ? What is $Y$ ? If $r$ is 5 percent, what is $I$ ? What is $Y$ ?
d. If $G$ increases, does the $I S$ curve shift upward and to the right or downward and to the left?

Accepted Answer

The answer of Assume that the consumption function is given...

Question 18

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances

Accepted Answer

The LM curve shows combinations of the interest rate and the level of income that are consistent with equilibrium in the market for real money balances. The curve is upward sloping as higher levels of income will result in higher demand for money balances and, therefore, a higher interest rate is required to maintain equilibrium.

Question 19

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively

Accepted Answer

In the goods and services market, higher levels of income lead to an increase in demand for goods and services, which in turn leads to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are negatively related in the goods and services market.

In the market for real money balances, higher levels of income lead to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are positively related in the market for real money balances.

Question 20

The IS-LM model is generally used:
A) only in the short run.
B) only in the long run.
C) both in the short run and the long run.
D) in determining the price level.

Accepted Answer

The IS-LM model is primarily used to analyze the interaction between the real economy (investment-savings, IS) and the money market (liquidity preference-money supply, LM) in the short run, focusing on the equilibrium in interest rates and output when prices are assumed to be fixed.

Quiz 11: Aggregate Demand I: Building the Is-Lm Model

The IS and LM curves together generally determine:

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent.

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

The interest rate determines in the goods market and money in the money market.

For any given interest rate and price level, an increase in the money supply:

The LM curve generally determines:

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

The intersection of the IS and LM curve determines the values of:

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for , and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

An increase in income raises money and the equilibrium interest rate.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Changes in monetary policy shift the:

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.

The IS-LM model is generally used:

Quiz 11: Aggregate Demand I: Building the Is-Lm Model

The IS and LM curves together generally determine:

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent.

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

The interest rate determines ______ in the goods market and money ______ in the money market.

For any given interest rate and price level, an increase in the money supply:

The LM curve generally determines:

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

The intersection of the IS and LM curve determines the values of:

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

An increase in income raises money ______ and ______ the equilibrium interest rate.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Changes in monetary policy shift the:

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

The IS-LM model is generally used:

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent.

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

The interest rate determines in the goods market and money in the money market.

Assume that the money demand function is (M/P) ^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for , and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for .

An increase in income raises money and the equilibrium interest rate.

Equilibrium levels of income and interest rates are related in the goods and services market, and equilibrium levels of income and interest rates are related in the market for real money balances.