Practice Quiz 7

Question 1

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes an ____ in money _____

Answer 1

Increase; demand

Question 2

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out

Answer 2

investment

Question 3

In the IS-LM model, when M reminds constant but P rises, in short run equilibirum, in the usual case, the interest rate ____ and the output ____

Answer 3

rises; falls

Question 4

If the demand for real money balances does not depend on the interest rate, then the LM curve

Answer 4

Is vertical

Question 5

If taxes are raised, but the Fed prevents income from falling by raising the money supply then

Answer 5

investment rises but consumption falls

Question 6

In the IS-LM model, a decrease in the interest rate would be the result of

Answer 6

An increase in the money supply

Question 7

In the IS-LM model, a decrease in output would be the result of an

Answer 7

Increase in money demand

Question 8

A decrease in the price level shifts the __ curve to the right, and the aggregate demand curve ___

Answer 8

Does not shift

Question 9

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

Answer 9

output will decrease but the price level will increase

Question 10

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ____ , shifting the ____ curve to the right and returning output to the natural level

Answer 10

decrease, LM

Question 11

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

Answer 11

leftward shift in the IS curve

Question 12

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

Answer 12

• the 25 percent reduction in the money supply between 1929 and 1933

Question 13

The money hypothesis suggests that the Great Depression was caused by a

Answer 13

Leftward shift in the LM curve

Question 14

In the IS-LM curve, starting with no expected inflation, if expected inflation becomes negative then the

Answer 14

IS curve shifts leftward

Question 15

One explation for the impact of expected price changes on the level of output is that an increase in expected deflation ____ the nominal interest rate to its limit and then ____ the real interest rate, so that investment spending declines

Answer 15

Lowers; raises

Question 16

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to credit worthy customers, which could be represented in the IS LM model as an

Answer 16

contractionary shift in the IS curve

Question 17

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 expect

Answer 17

high inflation