Chapter 5 IS-LM Model
Study Questions
1)
(a) The IS curve represents the
combinations of output and the
interest rate where the goods market is
in equilibrium.
(b) The IS curve represents the single level of
output where the goods market is in
equilibrium.
(c) The IS curve represents the single level of
output where financial markets are in
equilibrium.
(d) The IS curve represents the combinations
of output and the interest rate where the
money market is in equilibrium.
(e) none of the above
2)
Which of the following will occur if there is an
increase in taxes?
(a) The IS curve shifts and the economy
moves along the LM curve.
(b) Both the IS and LM curves shift.
(c) Output will change causing a change in
money demand and a shift of the LM curve.
(d) Neither the IS nor the LM curve shifts.
Suppose fiscal policy makers implement a
policy to reduce the size of a budget deficit.
Based on the IS-LM model, we know with
certainty that the following will occur as a
result of this fiscal policy action.
(a) Investment spending will increase.
(b) Investment spending will decrease.
(c) There will be no change in investment
spending.
(d) Investment spending may increase,
decrease, or not change.
(e) none of the above
8)
Suppose the economy is currently operating on
both the LM curve and the IS curve. Which of
the following is true for this economy?
(a) Production equals demand.
(b) The quantity supplied of bonds equals the
quantity demanded of bonds.
(c) Financial markets are in equilibrium.
(d) The money supply equals money demand.
(e) all of the above
5)
7)
an increase in taxes
an increase in government spending
an increase in consumer confidence
all of the above
none of the above
an open market purchase of bonds
an increase in consumer confidence
a reduction in taxes
an increase in output
all of the above
Suppose the central bank decides to conduct an
open market purchase of bonds. Which of the
following will occur as a result of this
monetary policy action?
(a) The LM curve shifts right.
(b) The IS curve shifts rightward as the interest
rate falls.
(c) The IS curve shifts leftward as the interest
rate increases.
(d) The LM curve shifts left.
(e) none of the above
Which of the following will cause a shift in the
LM curve?
(a)
(b)
(c)
(d)
(e)
4)
6)
Which of the following will cause a shift of the
IS curve?
(a)
(b)
(c)
(d)
(e)
3)
(e) The LM curve shifts and the economy
moves along the IS curve.
Which of the following is the correct definition
of the IS curve?
For this question, assume that investment
spending depends only on the interest rate and
no longer depends on output. Given this
information, an increase in government
spending:
(a) may cause investment to increase or to
decrease.
(b) will have no effect on output.
(c) will cause an increase in output and have no
effect on the interest rate.
(d) will cause investment to increase.
(e) will cause investment to decrease.
9)
Suppose investment spending is NOT very
sensitive to the interest rate. Given this
information, we know that:
(a) the LM curve should be relatively steep.
(b) the LM curve should be relatively flat.
(c) neither the IS nor the LM curve will be
affected.
(d) the IS curve should be relatively steep.
(e) the IS curve should be relatively flat.
Chapter 5 IS-LM Model
Study Questions
10)
A reduction in the money supply will cause a
reduction in which of the following variables?
(a)
(b)
(c)
(d)
(e)
11)
12)
output increases
output decreases
the interest rate decreases
both output and the interest rate increase
the interest rate increases
Suppose there is a Fed purchase of bonds and
simultaneous tax cut. We know with certainty
that this combination of policies must cause:
(a)
(b)
(c)
(d)
15)
the interest rate decreases
both output and the interest rate increase
output decreases
the interest rate increases
output increases
Suppose there is a simultaneous tax increase
and open market purchase of bonds. Which of
the following must occur as a result of this?
(a)
(b)
(c)
(d)
(e)
14)
consumption and output
consumption, investment and output
consumption
consumption and investment
consumption, output and the interest rate
Suppose there is a simultaneous tax cut and
open market purchase of bonds. Which of the
following must occur as a result of this?
(a)
(b)
(c)
(d)
(e)
13)
consumption
investment
output
all of the above
none of the above
Suppose there is an increase in consumer
confidence. Which of the following represents
the complete list of variables that must
increase in response to this increase in
consumer confidence?
(a)
(b)
(c)
(d)
(e)
an increase in the interest rate (i).
a reduction in i.
an increase in output (Y).
a reduction in Y.
We know with certainty that a tax increase
must cause which of the following?
(a)
(b)
(c)
(d)
16)
an increase in investment
no change in investment
a reduction in investment
none of the above
An increase in the reserve deposit ratio, q, will
most likely have which of the following
effects?
(a)
(b)
(c)
(d)
17)
The IS curve will NOT shift when which of the
following occurs?
(a)
(b)
(c)
(d)
(e)
18)
a rightward shift in the IS curve
a leftward shift in the IS curve
an leftward shift in the LM curve
a rightward shift in the LM curve
a reduction in government spending
a reduction in consumer confidence
a reduction in the interest rate
all of the above
none of the above
For this question, assume that investment
spending depends only on output and no longer
depends on the interest rate. Given this
information, an increase in government
spending:
(a) will cause investment to increase.
(b) may cause investment to increase or to
decrease.
(c) will have no effect on output.
(d) will cause an increase in output and have
no effect on the interest rate.
(e) will cause investment to decrease.