Practise Quiz 7 (IS-LM Model)

Question 1

Q1 - 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 a(n) ______ in money ______.

A - increase; supply
B - increase; demand
C - decrease; supply
D - decrease; demand

Answer 1

B - increase; demand

Question 2

Q2 - 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:

A - prices
B - investment
C - the money supply
D - taxes

Answer 2

B - investment

Question 3

Q3 - Graph

Answer 3

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Question 4

Q4 - In the IS–LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

A - rises; falls
B - rises; rises
C - falls; rises
D - falls; falls

Answer 4

A - rises; falls

Question 5

Q5 - If the demand for real money balances does not depend on the interest rate, then the LM curve:

A - slopes up to the right
B - slopes down to the right
C - is horizontal
D - is vertical

Answer 5

D - is vertical

Question 6

Q6 - If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

A - both consumption and investment remain unchanged.
B - consumption rises but investment falls
C - investment rises but consumption falls
D - both consumption and investment fall

Answer 6

C - investment rises but consumption falls

Question 7

Q7 - Graph

Answer 7

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Question 8

Q8 - In the IS–LM model, a decrease in the interest rate would be the result of a(n):

A - increase in the money supply
B - increase in government purchases
C - decrease in taxes
D - increase in money demand

Answer 8

A - increase in the money supply

Question 9

Q9 - In the IS-LM model, a decrease in output would be the result of a(n):

A - decrease in taxes
B - increase in the money supply
C - increase in money demand
D - increase in government purchases

Answer 9

C - increase in money demand

Question 10

Q10 - A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

A - IS; shifts to the right
B - IS; does not shift
C - LM: shifts to the right
D - LM; does not shift

Answer 10

D - LM; does not shift

Question 11

Q11 - Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

A - both output and the price level will increase
B - output will decrease, but the price level will increase
C - output will increase, but the price level will decrease
D - both output and the price level will decrease

Answer 11

B - output will decrease, but the price level will increase

Question 12

Q - 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.

A - increase; IS
B - decrease; IS
C - increase; LM
D - decrease; LM

Answer 12

D - decrease; LM

Question 13

Q13 - Graph

Answer 13

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Question 14

Q14 - The spending hypothesis suggests that the Great Depression was caused by a:

A - leftward shift in the IS curve
B - rightward shift in the IS curve
C - leftward shift in the LM curve
D - rightward shift in the LM curve

Answer 14

A - leftward shift in the IS curve

Question 15

Q15 - All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

A - the decline in investment spending on housing because of a decline in immigration in the 1930s.
B - the decline in consumption spending caused by the stock market crash of 1929.
C - fiscal policy to reduce the budget deficit by raising taxes in 1932.
D - the 25-percent reduction in the money supply between 1929 and 1933.

Answer 15

D - the 25-percent reduction in the money supply between 1929 and 1933.

Question 16

Q16 - The money hypothesis suggests that the Great Depression was caused by a:

A - leftward shift in the IS curve
B - rightward shift in the IS curve
C - leftward shift in the LM curve
D - rightward shift in the LM curve

Answer 16

C - leftward shift in the LM curve

Question 17

Q17 - In the IS–LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

A - IS curve shifts leftward
B - IS curve shifts rightward
C - LM curve shifts leftward
D - LM curve shifts rightward

Answer 17

A - IS curve shifts leftward

Question 18

Q18 - One explanation 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.

A - lowers; raises
B - raises; lowers
C - raises; raises
D - lowers; lowers

Answer 18

A - lowers; raises

Question 19

Q19 - During the financial crisis of 2008–2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS–LM model as a(n):

A - expansionary shift in the IS curve
B - contractionary shift in the IS curve
C - expansionary shift in the LM curve
D - contractionary shift in the Lm curve

Answer 19

B - contractionary shift in the IS curve

Question 20

Q20 - All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

A - high inflation
B - low interest rates
C - stock market volatility
D - falling house prices

Answer 20

A - high inflation