Ch 12

Question 1

The increase in income in response to a fiscal expansion in the IS–LM is:

Answer 1

less than in the Keynesian-cross model unless the LM curve is horizontal.

Question 2

The Pigou effect:

Answer 2

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.????

Question 3

An increase in consumer saving for any given level of income will shift the:

Answer 3

IS curve downward and to the left.

Question 4

An economic change that does not shift the aggregate demand curve is a change in:

Answer 4

The price level

Question 5

Using the IS–LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

Answer 5

Smaller than the multiplier

Question 6

If real money balances affect the IS–LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift:

Answer 6

both the LM and the IS curves.

Question 7

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

Answer 7

output will decrease, but the price level will increase.

Question 8

Exhibit: Policy Interaction

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____.

Answer 8

Decrease; lm3

Question 9

(Exhibit: IS–LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

Answer 9

r3, y2

Question 10

In the IS–LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ___

Answer 10

falls falls

Question 11

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

Answer 11

high inflation

Question 12

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

Answer 12

300

Question 13

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

Answer 13

from debtors to creditors; a smaller

Question 14

The monetary transmission mechanism works through the effects of changes in the money supply on:

Answer 14

investment

Question 15

The monetary transmission mechanism works through the effects of changes in the money supply on:

Answer 15

IS curve shifts leftward.

Question 16

In the IS–LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output

Answer 16

falls; rises

Question 17

In the IS–LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

Answer 17

decrease; decrease; decrease; decrease

Question 18

The spending hypothesis suggests that the Great Depression was caused by a:

Answer 18

leftward shift in the IS curve.

Question 19

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

Answer 19

smaller the sensitivity of investment spending to the interest rate.

Question 20

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

Answer 20

buy; lm