Question 1

With a decrease in government expenditure we

Accepted Answer

A)   move up along the aggregate demand curve.
B)   move down along the aggregate demand curve.
C)   shift the aggregate demand curve to the right.
D)   shift the aggregate demand curve to the left.E) None of the above
F) A) and D)

Question 2

At any point below the current LM curve there is an

Accepted Answer

A)   excess demand for money.
B)   excess supply of money.
C)   excess demand for goods.
D)   excess supply of goods.E) B) and C)
F) All of the above

Question 3

Assume that the Cambridge k = 0.2. If income increases by $20,000, the demand for money will change by

Accepted Answer

A)   $20,000.
B)   $10,000.
C)   $5,000.
D)   $4,000.E) B) and D)
F) None of the above

Question 4

A lower price level causes us to

Accepted Answer

A)   move up along the aggregate demand curve.
B)   move down along the aggregate demand curve.
C)   shift the aggregate demand curve to the right.
D)   shift the aggregate demand curve to the left.E) All of the above
F) B) and C)

Question 5

Fiscal policy is most effective when

Accepted Answer

A)   I is very sensitive to r.
B)   LP is not very sensitive to r.
C)   LP is very sensitive to r.
D)   I is not very sensitive to r.E) C) and D)
F) B) and C)

Question 6

Suppose k = 0.2. With a $200 billion increase in the money supply, the LM curve shifts

Accepted Answer

A)   to the right by $40 billion.
B)   to the left by $160 billion.
C)   to the left by $200 billion.
D)   to the right by $1000 billion.E) A) and B)
F) None of the above

Question 7

A decrease in money demand will shift the

Accepted Answer

A)   IS curve to the left.
B)   IS curve to the right.
C)   LM curve to the left.
D)   LM curve to the right.E) All of the above
F) None of the above

Question 8

In the LM curve, the __________ the interest-sensitivity of liquidity preference, the __________ the necessary increase in the rate of interest to restore equilibrium.

Accepted Answer

A)   greater; smaller
B)   greater; greater
C)   smaller; smaller
D)   None of the above.E) All of the above
F) None of the above

Question 9

The LM curve shows points of equilibrium in the money market and combinations of

Accepted Answer

A)   inflation and unemployment.
B)   aggregate supply and aggregate demand.
C)   income and the interest rate.
D)   money supply and money demand.E) A) and B)
F) None of the above

Question 10

In the ISLM framework, a declining price level causes

Accepted Answer

A)   interest rates to rise.
B)   income to fall.
C)   saving to rise.
D)   the LM curve to shift to the right.E) A) and B)
F) A) and C)

Question 11

Which of the following will cause the LM curve to shift to the right?

Accepted Answer

A)   An increase in investment
B)   An increase in money demand
C)   A decrease in velocity
D)   An increase in the money supplyE) A) and C)
F) A) and B)

Question 12

The two main determinants of money demand are

Accepted Answer

A)   GDP and the money supply.
B)   aggregate supply and aggregate demand.
C)   interest rates and income.
D)   the inflation rate and the money supply.E) B) and D)
F) B) and C)

Question 13

The transactions motive links money demand and

Accepted Answer

A)   interest rates.
B)   money supply.
C)   the liquidity trap.
D)   income.E) A) and B)
F) B) and C)

Question 14

In IS-LM analysis, the nominal interest rate is

Accepted Answer

A)   purely a monetary phenomenon.
B)   purely a real phenomenon.
C)   both a monetary and a real phenomenon.
D)   neither a real nor a monetary phenomenon, but determined by government policy.E) B) and D)
F) A) and B)

Question 15

At __________ income levels on the LM curve, the interest rate must be __________.

Accepted Answer

A)   higher; lower
B)   lower; higher
C)   higher; unchanged
D)   higher; higherE) B) and D)
F) C) and D)

Question 16

"The price level may fall but it will not necessarily lower the interest rate, not if we are in a liquidity trap." This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession.

Accepted Answer

A)   Classical; will
B)   Classical; may not be able to
C)   Keynesian; will
D)   Keynesian; may not be able toE) All of the above
F) A) and D)

Question 17

The smaller the marginal propensity to consume, the

Accepted Answer

A)   flatter the IS curve will be.
B)   steeper the IS curve will be.
C)   flatter the LM curve will be.
D)   steeper the LM curve will be.E) B) and C)
F) A) and D)

Question 18

When the LM curve is vertical,

Accepted Answer

A)   fiscal policy has no impact on equilibrium income.
B)   fiscal policy has no impact on the equilibrium interest rate.
C)   the economy is at full employment.
D)   monetary policy has no impact on equilibrium income.E) A) and B)
F) A) and C)

Question 19

In the IS curve, at __________ income levels, saving is __________, so the interest rate must be __________ to expand investment.

Accepted Answer

A)   higher; smaller; lower
B)   higher; larger; higher
C)   higher; larger; lower
D)   lower; larger; lowerE) A) and D)
F) B) and C)

Question 20

Starting from equilibrium in the ISLM framework, a decrease in money demand results in

Accepted Answer

A)   a rise in income and the interest rate.
B)   a rise in income and a decline in the interest rate.
C)   a decline in income and the interest rate.
D)   a decline in income and a rise in the interest rate.E) All of the above
F) None of the above

Exam 24: The ISLM World

The transactions motive links money demand and

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Assume that the Cambridge k = 0.2. If income increases by $20,000, the demand for money will change by

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The two main determinants of money demand are

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A lower price level causes us to

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At any point below the current LM curve there is an

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A decrease in money demand will shift the

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In IS-LM analysis, the nominal interest rate is

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In the IS curve, at __________ income levels, saving is __________, so the interest rate must be __________ to expand investment.

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Fiscal policy is most effective when

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When the LM curve is vertical,

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In the LM curve, the __________ the interest-sensitivity of liquidity preference, the __________ the necessary increase in the rate of interest to restore equilibrium.

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Suppose k = 0.2. With a $200 billion increase in the money supply, the LM curve shifts

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"The price level may fall but it will not necessarily lower the interest rate, not if we are in a liquidity trap." This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession.

Correct AnswerverifiedShow Answer

With a decrease in government expenditure we

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The LM curve shows points of equilibrium in the money market and combinations of

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At __________ income levels on the LM curve, the interest rate must be __________.

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In the ISLM framework, a declining price level causes

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The smaller the marginal propensity to consume, the

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Which of the following will cause the LM curve to shift to the right?

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Starting from equilibrium in the ISLM framework, a decrease in money demand results in

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In the IS curve, at income levels, saving is , so the interest rate must be __ to expand investment.

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In the LM curve, the the interest-sensitivity of liquidity preference, the the necessary increase in the rate of interest to restore equilibrium.

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"The price level may fall but it will not necessarily lower the interest rate, not if we are in a liquidity trap." This is a statement a economist might make as an explanation of why the economy pull out of a recession.

Correct Answer
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At income levels on the LM curve, the interest rate must be .

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