Chapter 13

Question 1

IS-LM model

Answer 1

A model of AD that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market

Question 2

IS curve

Answer 2

The negative relationship between the interest rate and the level of income that arises in the market for goods and services

Question 3

LM curve

Answer 3

The positive relationship between the interest rate and the level of income (while holding the price level fixed) that arises in the market for real money balances

Question 4

Keynesian cross

Answer 4

A simple model of income determination based on the ideas in Keynes’ General Theory, which shows how changes in spending can have a multiplied effect on aggregate income

Question 5

Government-purchases multiplier

Answer 5

The change in aggregate income resulting from a one-dollar change in government purchases

Question 6

How does fiscal policy shift the IS curve?

Answer 6

Changes in fiscal policy that raise the demand for goods and services shift the IS curve to the right. Changes in fiscal policy that reduce the demand for goods and services shift the IS curve to the left

Question 7

Theory of liquidity preference

Answer 7

A simple model of the interest rate based on the ideas in Keynes’ General Theory, which says that the interest rate adjusts to equilibrate the supply and demand for real money balances

Question 8

How does monetary policy shift the LM curve?

Answer 8

Decreases in the supply of real money shift the LM curve upward. Increases in the supply of real money shift the LM curve downward