ch 11.2

Question 1

The IS-LM curve sweeps something under the rug. What is that thing?

Answer 1

the distinction between real and nominal interest rates

Question 2

Exhibit: Keynesian Cross

Answer 2

rise;Decrease

Question 3

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

Answer 3

unplanned inventory investment.

Question 4

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

Answer 4

a higher interest rate.

Question 5

A variable that links the market for goods and services and the market for real money balances in the IS–LM model is the:

Answer 5

interest rate.

Question 6

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

Answer 6

increases; increases

Question 7

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:

Answer 7

1,600.

Question 8

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

Answer 8

production

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:

Answer 9

drop by 2 percent.

Question 10

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.

Answer 10

negatively; positively

Question 11

Exhibit: Market for Real Money Balances

Answer 11

Sell rise

Question 12

The IS and LM curves together generally determine:

Answer 12

both income and the interest rate.

Question 13

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

Answer 13

right with a slope less than one.

Question 14

If the interest rate is above the equilibrium value, it would be most precise to say that:

Answer 14

the quantity of real balances supplied exceeds the quantity demanded.

Question 15

The <i>IS</i> curve plots the relationship between the interest rate and ______ that arises in the market for ______.

Answer 15

equilibrium national income; goods and services

Question 16

The Keynesian cross show

Answer 16

determination of the equilibrium income in the short run.

Question 17

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y – T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

Answer 17

260

Question 18

A decrease in the price level, holding nominal money supply constant, will shift the LM curve:

Answer 18

downward and to the right.

Question 19

In the Keynesian cross model, if taxes are reduced by 100, the immediate effect on planned expenditures is a(n) ______ for any given level of income

Answer 19

increase of less than 100

Question 20

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

Answer 20

unplanned inventory investment.