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popovic, danica
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In The General Theory of Employment, Interest, and Money, John Maynard Keynes
proposed that the Great Depression was caused by
1
A. government budget deficits.
B. low aggregate demand.
C. saving rates that were too low.
D. inept monetary policy.
2
Which of the following is NOT exogenous in the IS–LM model?
A. the interest rate
B. taxes
C. the price level
D. government expenditure
In the Keynesian cross model of Chapter 10, if the interest rate is constant and the
MPC is 0.7, then the government purchases multiplier is
3
A. 0.3.
B. 0.7.
C. 1.4.
D. 3.3.
In the Keynesian cross model of Chapter 10, if the interest rate is constant, the MPC
is 0.6, and taxes are increased by $100, by how much does income change?
4
A. It increases by $150.
B. It decreases by $150.
C. It increases by $166.
D. It decreases by $166.
The relationship between interest rates and the level of income that arises in the
market for goods and services is called the
5
A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
The investment function and the IS curve slope
6
A. upward because higher interest rates induce more investment.
B. upward because higher interest rates induce less investment.
C. downward because higher interest rates induce more investment.
D. downward because higher interest rates induce less investment.
The slope of the IS curve depends on
7
A. the sensitivity of investment to the interest rate.
B. the level of government expenditures.
C. the sensitivity of the demand for real money balances to the interest rate.
D. none of the above.
The IS curve is drawn for a given
8
A. fiscal policy
B. monetary policy.
C. interest rate.
D. level of income.
9
If investment becomes less sensitive to the interest rate, then the
A. LM curve becomes steeper.
B. LM curve becomes flatter.
C. IS curve becomes steeper.
D. IS curve becomes flatter.
10
If the marginal propensity to consume is large, then the
A. LM curve is relatively steep.
B. LM curve is relatively flat.
C. IS curve is relatively steep.
D. IS curve is relatively flat.
12
The LM curve is drawn for a given
A. real income.
B. nominal income.
C. money supply.
D. interest rate.
The relationship between the interest rate and the level of income that arises in the
market for money balances is called the
13
A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
14 in the early 1980s the Federal Reserve, under Paul Volcker, began a period of tight
money aimed at reducing inflation. Under this policy, nominal interest rates were:
A. higher in the short run and higher in the long run.
B. higher in the short run and lower in the long run.
C. lower in the short run and higher in the long run.
D. lower in the short run and lower in the long run.
15 In the quantity theory interpretation of the LM curve, the LM curve slopes up
because
A. a higher inflation rate implies a higher interest rate.
B. velocity depends on the interest rate.
C. when income rises, a lower interest rate is necessary to equilibrate the money
market.
D. for a given price level, the supply of money determines the level of income.
16 If the central bank increased the supply of real money balances, then the LM curve
would
A. become steeper.
B. become flatter.
C. shift inward.
D. shift outward.
17 If money demand became more sensitive to the level of income, the LM curve would
A. become steeper.
B. become flatter.
C. shift inward.
D. shift outward.
18 The “money hypothesis” explaining the Great Depression stipulates that the
Depression was caused by a contractionary shift in the LM curve. Which of the following
facts supports this hypothesis?
A. The stock market crash of 1929 reduced real wealth
B. The interest rate did not rise
C. The nominal money supply contracted and the price level fell dramatically
D. Real balances did not fall
19 The “spending hypothesis” explaining the Great Depression stipulates that the main
cause of the Great Depression was a decline in spending. Which of the following does not
support this hypothesis?
A. Investment in housing declined.
B. Widespread bank failures occurred.
C. Government purchases rose during 1929–1932.
D. The stock market crash of 1929 reduced real wealth.
20 The Pigou effect stipulates
A. falling prices expand income.
B. falling prices depress income.
C. expanding income leads to a higher price level.
D. falling income leads to a lower price level.
21
Debt-deflation leads to lower income because
A. falling prices redistribute income from creditors to debtors, which leads to a decline
in the APC.
B. falling prices redistribute income from debtors to creditors, which leads to a decline
in the APC.
C. a rise in the saving rate leads to a lower amount of real debt in the economy,
depressing consumption and therefore income.
D. a fall in the saving rate leads to higher interest rates and lower income.
22 Most economists believe that the Great Depression is unlikely to be repeated in the
future. Which of the following is NOT a legitimate reason to believe this?
A. The Fed will not let the money supply fall by a large amount.
B. More effort is made today to balance the government budget.
C. Widespread bank failures are less likely to occur.
D. The income tax provides an automatic stabilizer today.
23 Some economists believe that a liquidity trap may occur when
A. the real interest rate is negative.
B. the unemployment rate exceeds 10 percent.
C. the nominal interest rate is close to zero.
D. output growth exceeds its long-run potential rate.