question
If the IS curve shifts right, in the short run
a. the interest rate and output rise.
b. the interest rate rises and output falls.
c. the interest rate falls and output rises.
d. the interest rate and output rise.
a. the interest rate and output rise.
b. the interest rate rises and output falls.
c. the interest rate falls and output rises.
d. the interest rate and output rise.
answer
a. the interest rate and output rise.
question
If the government raises its purchases
a. the IS curve shifts left and output falls.
b. the IS curve shifts right and output rises.
c. the LM curve shift right and output falls.
d. The LM curve shifts left and output rises.
e. None of the above are correct.
a. the IS curve shifts left and output falls.
b. the IS curve shifts right and output rises.
c. the LM curve shift right and output falls.
d. The LM curve shifts left and output rises.
e. None of the above are correct.
answer
b. the IS curve shifts right and output rises.
question
If the government reduces taxes, the interest rate
a. falls so output rises by more than the multiplier indicates.
b. falls so output rises by less than the multiplier indicates.
c. rises so output rises by more than the multiplier indicates.
d. rises so output rises by less than the multiplier indicates.
a. falls so output rises by more than the multiplier indicates.
b. falls so output rises by less than the multiplier indicates.
c. rises so output rises by more than the multiplier indicates.
d. rises so output rises by less than the multiplier indicates.
answer
d. rises so output rises by less than the multiplier indicates.
question
If the government decreases transfer payments, the change in output
a. increases money demand so the interest rate rises.
b. increases money demand so the interest rate falls.
c. decreases money demand so the interest rate rises.
d. decreases money demand so the interest rate falls.
a. increases money demand so the interest rate rises.
b. increases money demand so the interest rate falls.
c. decreases money demand so the interest rate rises.
d. decreases money demand so the interest rate falls.
answer
d. decreases money demand so the interest rate falls.
question
Which of the following policies cause the interest to change in the direction that reduces investment spending?
a. both an increase in transfer payments and an increase in government purchases.
b. an increase in transfer payments but not an increase in government purchases.
c. an increase in government purchases but not an increase in transfer payments.
d. neither an increase in government purchase nor an increase in transfer payments.
a. both an increase in transfer payments and an increase in government purchases.
b. an increase in transfer payments but not an increase in government purchases.
c. an increase in government purchases but not an increase in transfer payments.
d. neither an increase in government purchase nor an increase in transfer payments.
answer
a. both an increase in transfer payments and an increase in government purchases.
question
An increase in the money supply
a. raises output by raising interest rates.
b. raises output by reducing interest rates.
c. reduces output by raising interest rates.
d. reduces output by reducing interest rates.
a. raises output by raising interest rates.
b. raises output by reducing interest rates.
c. reduces output by raising interest rates.
d. reduces output by reducing interest rates.
answer
b. raises output by reducing interest rates.
question
An increase in the money supply shifts
a. the LM curve and the IS curve left.
b. the LM curve left but not shift the IS curve.
c. the LM curve and the IS curve right.
d. the LM curve right but does not shift the IS curve.
a. the LM curve and the IS curve left.
b. the LM curve left but not shift the IS curve.
c. the LM curve and the IS curve right.
d. the LM curve right but does not shift the IS curve.
answer
d. the LM curve right but does not shift the IS curve.
question
You observe that interest rates have risen while output has fallen this would be consistent with
a. the IS curve shifting right.
b. the IS curve shifting left.
c. the LM cure shifting right.
d. the LM curve shifting left.
a. the IS curve shifting right.
b. the IS curve shifting left.
c. the LM cure shifting right.
d. the LM curve shifting left.
answer
d. the LM curve shifting left.
question
Suppose that the amount of money demanded per unit of income rose, this would
a. raise the interest rate in the money market and so shift the LM curve up.
b. raise the interest rate in the money market and so shift the LM curve down.
c. reduce the interest rate in the money market and so shift the LM curve up.
d. reduce the interest rate in the money market and so shift the LM curve down. e. None of the above are correct.
a. raise the interest rate in the money market and so shift the LM curve up.
b. raise the interest rate in the money market and so shift the LM curve down.
c. reduce the interest rate in the money market and so shift the LM curve up.
d. reduce the interest rate in the money market and so shift the LM curve down. e. None of the above are correct.
answer
a. raise the interest rate in the money market and so shift the LM curve up.
question
You observe that interest rates and output have risen, this would be consistent with a. an increase in taxes.
b. an increase in money supply.
c. an increase in government purchases.
d. an increase in the amount of money demanded per unit of income.
b. an increase in money supply.
c. an increase in government purchases.
d. an increase in the amount of money demanded per unit of income.
answer
c. an increase in government purchases.
question
If the government increased its purchases and the Fed increased the money supply, then
a. output would rise and the effects on the interest rate would be uncertain.
b. output would fall and the effect on the interest rate would be uncertain.
c. the interest rate would rise and the effect on output would be uncertain.
d. the interest rate would fall and the effect on output would be uncertain.
a. output would rise and the effects on the interest rate would be uncertain.
b. output would fall and the effect on the interest rate would be uncertain.
c. the interest rate would rise and the effect on output would be uncertain.
d. the interest rate would fall and the effect on output would be uncertain.
answer
a. output would rise and the effects on the interest rate would be uncertain.
question
If the government reduced taxes and the Fed wanted to offset the effects of this policy on output, it would
a. increase the money supply which would also move the interest rate closer to its
original value.
b. increase the money supply which would move the interest rate further from its
original value.
c. decrease the money supply which would also move the interest rate closer to its
original value.
d. decrease the money supply which would move the interest rate further from its
original value.
a. increase the money supply which would also move the interest rate closer to its
original value.
b. increase the money supply which would move the interest rate further from its
original value.
c. decrease the money supply which would also move the interest rate closer to its
original value.
d. decrease the money supply which would move the interest rate further from its
original value.
answer
d. decrease the money supply which would move the interest rate further from its
original value.
original value.
question
If the government increased its purchases and the Fed wanted to offset the effects of this policy on interest rates it would
a. increase the money supply which would also move output closer to its natural rate.
b. increase the money supply which would move output further from its natural rate.
c. decrease the money supply which would also move output closer to its natural
rate.
d. decrease the money supply which would move output further from its natural rate.
a. increase the money supply which would also move output closer to its natural rate.
b. increase the money supply which would move output further from its natural rate.
c. decrease the money supply which would also move output closer to its natural
rate.
d. decrease the money supply which would move output further from its natural rate.
answer
b. increase the money supply which would move output further from its natural rate.
question
If the government reduced transfer payments, and the Fed wanted to offset the effects of this policy on the interest rate, it would
a. increase the money supply which would also move output closer to its natural rate.
b. increase the money supply which would move output further from its natural rate.
c. decrease the money supply which would also move output closer to its natural
rate.
d. decrease the money supply which would move output further from its natural rate.
a. increase the money supply which would also move output closer to its natural rate.
b. increase the money supply which would move output further from its natural rate.
c. decrease the money supply which would also move output closer to its natural
rate.
d. decrease the money supply which would move output further from its natural rate.
answer
d. decrease the money supply which would move output further from its natural rate.
question
Suppose that people choose to hold less money per dollar of income, then
a. to return interest rates to their original level, the Fed would increase the money
supply which would also move output back towards its original level.
b. to return interest rates to their original level, the Fed would increase the money
supply which would also move output further from its original level.
c. to return interest rates to their original level, the Fed would decrease the money
supply which would also move output back towards its original level.
d. to return interest rates to their original level, the Fed would decrease the money
supply which would also move output further from its original level.
a. to return interest rates to their original level, the Fed would increase the money
supply which would also move output back towards its original level.
b. to return interest rates to their original level, the Fed would increase the money
supply which would also move output further from its original level.
c. to return interest rates to their original level, the Fed would decrease the money
supply which would also move output back towards its original level.
d. to return interest rates to their original level, the Fed would decrease the money
supply which would also move output further from its original level.
answer
c. to return interest rates to their original level, the Fed would decrease the money
supply which would also move output back towards its original level.
supply which would also move output back towards its original level.
question
Which of the following shifts the AD curve to the right?
a. firms develop a more pessimistic outlook concerning future economic conditions.
b. households become more confident of job security and rising income
c. the money supply decreases
d. the demand for money rises due to concerns about the security of credit cards and
the decrease in merchants who accept them due to rising processing costs e. More than one of the above is correct.
a. firms develop a more pessimistic outlook concerning future economic conditions.
b. households become more confident of job security and rising income
c. the money supply decreases
d. the demand for money rises due to concerns about the security of credit cards and
the decrease in merchants who accept them due to rising processing costs e. More than one of the above is correct.
answer
b. households become more confident of job security and rising income
question
Which of the following contributed to the Recession of 2001?
a. After a boom in the stock market, stock prices fell steeply.
b. The 9/11 terrorist attacks created uncertainty.
c. Accounting scandals at some well-known corporations depressed stock prices.
d. All of the above are correct.
a. After a boom in the stock market, stock prices fell steeply.
b. The 9/11 terrorist attacks created uncertainty.
c. Accounting scandals at some well-known corporations depressed stock prices.
d. All of the above are correct.
answer
d. All of the above are correct.
question
In response to the recession of 2001 which policies did policymakers use?
a. increases in the money supply
b. tax cuts
c. increased government expenditures
d. All of the above.
a. increases in the money supply
b. tax cuts
c. increased government expenditures
d. All of the above.
answer
d. All of the above.
question
According to the IS-LM model a decrease in taxes would
a. raise consumption and investment.
b. raise consumption and reduce investment.
c. reduce consumption and raise investment.
d. reduce consumption and investment.
a. raise consumption and investment.
b. raise consumption and reduce investment.
c. reduce consumption and raise investment.
d. reduce consumption and investment.
answer
b. raise consumption and reduce investment.
question
If the price level rises, then
a. the LM curve shifts up and spending rises.
b. the LM curve shifts up and spending falls.
c. the LM curve shifts down and spending rises.
d. the LM curve shifts down and spending falls.
a. the LM curve shifts up and spending rises.
b. the LM curve shifts up and spending falls.
c. the LM curve shifts down and spending rises.
d. the LM curve shifts down and spending falls.
answer
b. the LM curve shifts up and spending falls.
question
If the price level falls, then in the short run in the IS-LM diagram
a. the interest rate rises so investment spending rises.
b. the interest rate rises so investment spending falls.
c. the interest rate falls so investment spending rises.
d. the interest rate falls so investment spending falls.
a. the interest rate rises so investment spending rises.
b. the interest rate rises so investment spending falls.
c. the interest rate falls so investment spending rises.
d. the interest rate falls so investment spending falls.
answer
c. the interest rate falls so investment spending rises.
question
The aggregate demand curve shifts right if for some reason other than a change in the price level
a. IS or LM shift right.
b. IS shifts right or LM shifts left
c. IS shifts left or IS shifts left. d. IS or LM shift left.
a. IS or LM shift right.
b. IS shifts right or LM shifts left
c. IS shifts left or IS shifts left. d. IS or LM shift left.
answer
a. IS or LM shift right.
question
The aggregate demand curve shifts right if
a. taxes or the money supply rise.
b. taxes rise or the money supply falls.
c. taxes fall or the money supply rises.
d. taxes or the money supply fall.
a. taxes or the money supply rise.
b. taxes rise or the money supply falls.
c. taxes fall or the money supply rises.
d. taxes or the money supply fall.
answer
c. taxes fall or the money supply rises.
question
The aggregate demand curve shifts left if
a. transfer payments fall or people want to hold more money per unit of income.
b. transfer payments rise or people want to hold more money per unit of income.
c. transfer payments rise or people want to hold less money per unit of income.
d. transfer payment fall or people want to hold less money per unit of income.
a. transfer payments fall or people want to hold more money per unit of income.
b. transfer payments rise or people want to hold more money per unit of income.
c. transfer payments rise or people want to hold less money per unit of income.
d. transfer payment fall or people want to hold less money per unit of income.
answer
a. transfer payments fall or people want to hold more money per unit of income.
question
Suppose that the money supply increases, then
a. the LM curve and the AD curve shift right.
b. the LM curve and the AD curve shift left.
c. the IS curve and the AD curve shift right.
d. the IS curve and the AD curve shift left.
a. the LM curve and the AD curve shift right.
b. the LM curve and the AD curve shift left.
c. the IS curve and the AD curve shift right.
d. the IS curve and the AD curve shift left.
answer
a. the LM curve and the AD curve shift right.
question
Suppose the money supply increases and the Fed takes no further action, then in the long run
a. the LM curve and the SRAS curve will shift up.
b. the LM curve will shift up and the SRAS curve will shift down.
c. the LM curve will shift down and the SRAS curve will shift up.
d. the LM curve and the SRAS curve will shift up.
a. the LM curve and the SRAS curve will shift up.
b. the LM curve will shift up and the SRAS curve will shift down.
c. the LM curve will shift down and the SRAS curve will shift up.
d. the LM curve and the SRAS curve will shift up.
answer
a. the LM curve and the SRAS curve will shift up.
question
As the economy self corrects from the long run to the short run after an increase in taxes
a. the IS curve and the AD curve shift right.
b. the IS curve and the AD curve shift left.
c. the LM curve and the SRAS curve shift up.
d. the LM curve and the SRAS curve shift down.
a. the IS curve and the AD curve shift right.
b. the IS curve and the AD curve shift left.
c. the LM curve and the SRAS curve shift up.
d. the LM curve and the SRAS curve shift down.
answer
d. the LM curve and the SRAS curve shift down.
question
The Great Depression was associated with
a. a housing bust and an increase in taxes.
b. a housing bust but not an increase in taxes.
c. an increase in taxes but not a housing bust.
d. neither a housing bust nor an increase in taxes.
a. a housing bust and an increase in taxes.
b. a housing bust but not an increase in taxes.
c. an increase in taxes but not a housing bust.
d. neither a housing bust nor an increase in taxes.
answer
a. a housing bust and an increase in taxes.
question
Real money balances were lower than previously
a. during the start and in the midst of the Great Depression.
b. during the start but not in the midst of the Great Depression.
c. during the midst but not the start of the Great Depression.
d. neither during the start of or in the midst of the Great Depression.
a. during the start and in the midst of the Great Depression.
b. during the start but not in the midst of the Great Depression.
c. during the midst but not the start of the Great Depression.
d. neither during the start of or in the midst of the Great Depression.
answer
c. during the midst but not the start of the Great Depression.
question
At the start of the Great Depression
a. the nominal money supply and the price level rose.
b. the nominal money supply fell and the price level rose.
c. the nominal money supply rose and the price level fell.
d. the nominal money supply and the price level fell.
a. the nominal money supply and the price level rose.
b. the nominal money supply fell and the price level rose.
c. the nominal money supply rose and the price level fell.
d. the nominal money supply and the price level fell.
answer
d. the nominal money supply and the price level fell.
question
An unexpected decrease in inflation transfers wealth from
a. creditors to debtors, this reduces output if debtors have a higher MPC then
creditors.
b. creditors to debtors, this reduces output if creditors have a higher MPC then
debtors.
c. debtors to creditors, this reduces output if debtors have a higher MPC then
creditors.
d. debtors to creditors, this raises output if creditors have a higher MPC then debtors.
a. creditors to debtors, this reduces output if debtors have a higher MPC then
creditors.
b. creditors to debtors, this reduces output if creditors have a higher MPC then
debtors.
c. debtors to creditors, this reduces output if debtors have a higher MPC then
creditors.
d. debtors to creditors, this raises output if creditors have a higher MPC then debtors.
answer
c. debtors to creditors, this reduces output if debtors have a higher MPC then
creditors.
creditors.
question
In the short run a decrease in expected inflation
a. raises the real interest rate and reduces investment spending.
b. raises the real interest rate and raises investment spending.
c. reduces the real interest rate and reduces investment spending.
d. reduces the real interest rate and raises investment spending.
a. raises the real interest rate and reduces investment spending.
b. raises the real interest rate and raises investment spending.
c. reduces the real interest rate and reduces investment spending.
d. reduces the real interest rate and raises investment spending.
answer
a. raises the real interest rate and reduces investment spending.
question
The recession of 2008 and 2009 is associated with a
a. decline in housing prices.
b. a decrease in transfer payments.
c. a decrease in the money supply.
d. All of the above are correct.
a. decline in housing prices.
b. a decrease in transfer payments.
c. a decrease in the money supply.
d. All of the above are correct.
answer
a. decline in housing prices.
question
Which of the following did the Government and the Fed do in an attempt to reduce the severity of the 2008-2009 recession?
a. Increase taxes and reduce government expenditures
b. Increase the money supply to reduce interest rates
c. Sell long-term bonds to raise interest rates.
d. All of the above.
a. Increase taxes and reduce government expenditures
b. Increase the money supply to reduce interest rates
c. Sell long-term bonds to raise interest rates.
d. All of the above.
answer
b. Increase the money supply to reduce interest rates
question
Explain why the aggregate demand curve slopes downward.
answer
The aggregate demand curve slopes down because as the price level rises, real money balances fall which raises real interest rates and so decreases planned investment spending which decreases output demanded. Notes: Try this starting with "as the price level falls." As the price level rises the LM curve shifts left so the interest rate rises and output falls. Draw the IS-LM diagram to demonstrate this to yourself. Also, see figure 11-5 in the text.
question
According to the IS-LM model, what happens in the short run to r, Y, C, and I under the following circumstances?
a. CB increases the money supply
b. Government increases government purchases
c. Government increases taxes
d. Government increases government purchases and taxes by equal amounts
a. CB increases the money supply
b. Government increases government purchases
c. Government increases taxes
d. Government increases government purchases and taxes by equal amounts
answer
Money supply rises - r falls, Y rises, C rises, I rises
G increases - r rises, Y rises, C rises, I falls
T increases - r falls, Y falls, C falls, I rises
G and T increase by the same amount - r rises, Y rises, C falls, I falls
G increases - r rises, Y rises, C rises, I falls
T increases - r falls, Y falls, C falls, I rises
G and T increase by the same amount - r rises, Y rises, C falls, I falls
question
Use the IS-LM model to predict the short-run effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Fed should do to keep income at its initial level.
a. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems.
b. A wave of credit card fraud increases the frequency with which people make transactions in cash.
c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.
d. The appointment of a new "dovish" Federal Reserve chair increases expected inflation.
a. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems.
b. A wave of credit card fraud increases the frequency with which people make transactions in cash.
c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.
d. The appointment of a new "dovish" Federal Reserve chair increases expected inflation.
answer
I rises - r rises, Y rises, C rises, I rises
Money demand rises - r rises, Y falls, C falls, I falls
Saving rate rises - r falls, Y falls, C falls, I rises
Expected inflation rises - r rises, Y falls, C falls, I falls
If investment rises, the IS curve shifts right. To move output back to its original level, the Fed would decrease the money supply.
If money demand rises, the LM curve shifts left. To move output back to its original level, the Fed would increase the money supply.
If the saving rate rises, the IS curve shifts left. To move output back to its original level, the Fed would increase the money supply.
If expected inflation rises, the price level rises (see the logic for the reverse case on pages 115-16) so the LM curve shifts left. To move output back to its original level, the Fed would increase the money supply.
Money demand rises - r rises, Y falls, C falls, I falls
Saving rate rises - r falls, Y falls, C falls, I rises
Expected inflation rises - r rises, Y falls, C falls, I falls
If investment rises, the IS curve shifts right. To move output back to its original level, the Fed would decrease the money supply.
If money demand rises, the LM curve shifts left. To move output back to its original level, the Fed would increase the money supply.
If the saving rate rises, the IS curve shifts left. To move output back to its original level, the Fed would increase the money supply.
If expected inflation rises, the price level rises (see the logic for the reverse case on pages 115-16) so the LM curve shifts left. To move output back to its original level, the Fed would increase the money supply.
question
Use the IS-LM diagram to describe both the short-run effects and the long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and the real money balances.
a. increase in money supply
b. increase in government purchases
c. increase in taxes
a. increase in money supply
b. increase in government purchases
c. increase in taxes
answer
a. An increase in the money supply shifts the LM curve and the AD curve right. In the short run the interest rate falls, investment rises, output rises, consumption rises, and the price level is unchanged. Since output is above its natural rate, firms are producing more than desired and will eventually raise their prices. As they raise their prices, the SRAS curve and the LM curve shift up. In the long run the interest rate, investment, output, and consumption are unchanged and the price level is higher.
b. An increase in government purchases shifts the IS curve and the AD curve to the right. In the short run the interest rate rises, investment spending falls, output rises, consumption rises, and the price level is unchanged. Since output is above its natural rate, firms are producing more than desired and will eventually raise their prices. As they raise their prices, the SRAS curve and the LM curve shift up. In the long run output and consumption are unchanged, the interest rate and price level are higher, and investment is lower.
c. An increase in taxes shifts the IS curve and the AD curve to the left. In the short run, the interest rate falls, investment spending rises, and output falls. Since output is below its natural rate, firms are producing less than desired and will eventually reduce their prices. As they reduce their prices, the SRAS curve and the LM curve shift down. In the long run the interest rate, price level, and consumption are lower while investment is higher.
b. An increase in government purchases shifts the IS curve and the AD curve to the right. In the short run the interest rate rises, investment spending falls, output rises, consumption rises, and the price level is unchanged. Since output is above its natural rate, firms are producing more than desired and will eventually raise their prices. As they raise their prices, the SRAS curve and the LM curve shift up. In the long run output and consumption are unchanged, the interest rate and price level are higher, and investment is lower.
c. An increase in taxes shifts the IS curve and the AD curve to the left. In the short run, the interest rate falls, investment spending rises, and output falls. Since output is below its natural rate, firms are producing less than desired and will eventually reduce their prices. As they reduce their prices, the SRAS curve and the LM curve shift down. In the long run the interest rate, price level, and consumption are lower while investment is higher.
question
Other things the same explain how and in which direction an increase in the price level would change the aggregate quantity of goods and services demanded.
answer
An increase in the price level reduces the supply of real balances so that the equilibrium interest rate in the market for money rises and the LM curve shifts left. The increase in the interest rate reduces desired investment spending shown as a move up along the IS curve. This decrease in planned spending reduces output.
question
Show the short run effects of a decrease in government expenditures in the IS-LM model and the AD-AS model.
answer
IS shifts left, r is bid up, Y falls
AD shifts left, Y falls, SRAS stays the same
AD shifts left, Y falls, SRAS stays the same
question
Refer to the previous question. Assuming no further government policy, explain what happens to return the economy to the natural rate of output. Use both the IS-LM diagram and the AD-AS diagram to illustrate your answer.
answer
B/c output is below its natural rate, there will be downward pressures on prices. So, firms will eventually reduce prices. This reduction in prices shifts the SRAS curve down and also shifts the LM curve down. There will continue to be downward pressures on prices and so firms will continue to reduce prices until the economy returns the natural rate of output is reached.
question
If consumers and businesses become more optimistic about the future of the economy: A. What can the Fed do to return output towards its natural rate? B. What can the government do to return output towards its natural rate?
answer
A. reduce the money supply
B. reduce G, reduce transfers, or raise taxes
B. reduce G, reduce transfers, or raise taxes
question
Was the recession of 2001 caused by a shift in IS or LM? By a shift in AD or SRAS?
answer
IS and AD. Stock prices fell, stock fraud raised uncertainty and made it more difficult for firms to raise funds, 9-11 created uncertainty and so reduced spending
question
Briefly summarize the cause of the recession of 2008.
answer
Housing prices fell as foreclosures rose. These events lead to a reduction in bank lending. Uncertainty reduced investment and stock prices.
question
What is deflation? How might it have worsened the Great Depression?
answer
A drop in the price level(negative inflation). It raised the real value of interest payments on existing loans raising consumption of lenders but likely reducing the consumption of borrowers by more and so shifting the IS and AD curves left.
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