Chapter 23 Monetary and Fiscal Policy in the ISLM Model
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5) An increase in the money supply, other things equal, shifts the _____ curve to the _____.
A) IS; right B) IS; left C) LM; left D) LM; right
Answer: D
10) In the ISLM framework a contractionary fiscal policy causes aggregate output to _____ and the interest rate to _____.
A) increase; increase B) increase; decrease
C) decrease; decrease D) decrease; increase
Answer: C
15) The less interest-sensitive is money demand,
A) the more effective is fiscal policy relative to monetary policy.
B) the more effective is monetary policy relative to fiscal policy.
C) the steeper is the IS curve.
D) the flatter is the LM curve.
Answer: B
20) Other things being equal, an increase in government spending will
A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) move the economy down a fixed aggregate demand curve.
D) move the economy up a fixed aggregate demand curve.
Answer: A
25) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift _____ and the equilibrium level of aggregate output to _____.
A) up; rise B) up; fall C) down; rise D) down; fall
Answer: A
30) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift _____ and the equilibrium level of aggregate output to _____.
A) up; rise B) up; fall C) down; rise D) down; fall
Answer: D
35) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to _____, and the IS curve to shift to the _____.
A) rise; left B) rise; right C) fall; left D) fall; right
Answer: B
40) An increase in the quantity of money supplied shifts the money supply curve to the _____, and the equilibrium interest rate _____.
A) right; falls B) right; rises C) left; falls D) left; rises
Answer: A
45) In the money market, a condition of excess supply of money can be eliminated by a _____ in aggregate output or a _____ in the interest rate, both of which increase the quantity of money demanded.
A) rise; rise B) rise; fall C) fall; rise D) fall; fall
Answer: B
50) An increase in the money supply shifts the LM curve to the right, causing the interest rate to _____ and output to _____.
A) rise; rise B) rise; fall C) fall; rise D) fall; fall
Answer: C
55) If the _____ curve is more unstable than the _____ curve, a money supply target is preferred.
A) IS; IS B) IS; LM C) LM; IS D) LM; LM
Answer: B
60) The aggregate demand curve has the usual downward slope, since a higher price level reduces the real money supply, _____ interest rates, and _____ the equilibrium level of aggregate output.
A) raises; lowers B) raises; raises C) lowers; lowers D) lowers; raises
Answer: A
65) Factors that cause the IS curve to shift include
A) changes in autonomous consumer spending.
B) changes in the money supply.
C) changes in investment spending related to a change in the interest rate.
D) only (a) and (b) of the above.
Answer: A
70) Factors that cause the aggregate demand curve to shift include
A) changes in autonomous consumer spending.
B) changes in taxes.
C) changes in the money supply.
D) all of the above.
E) only (a) and (b) of the above.
Answer: D
75) If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to _____ causing aggregate demand to _____.
A) fall; fall B) fall; rise C) rise; fall D) rise; rise
Answer: A
80) A shift in tastes toward foreign goods _____ net exports and causes the quantity of aggregate output demanded to _____.
A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall
Answer: B
85) An increase in the value of the dollar makes foreign goods cheaper relative to American goods, resulting in a _____ in net exports and a _____ shift of the IS curve.
A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward
Answer: A
90) Changes in the interest rate affect planned investment spending and hence the equilibrium level of output,
A) but this change in investment spending merely causes a movement along the IS curve and not a shift.
B) but this change in investment spending is crowded out by higher taxes.
C) but this change in investment spending is crowded out by higher government spending.
D) but this change in investment spending is crowded out by lower consumer expenditures.
Answer: A
Answer: D
95) Which of the following statements concerning Keynesian ISLM analysis are true?
A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending.
B) An increase in net exports arising from a reduction in interest rates causes the IS curve to shift rightward.
C) A rise in the money supply shifts the LM curve to the left.
D) Only (a) and (b) of the above.
Answer: D
100) In deriving the aggregate demand curve a _____ price level _____ the money supply in real terms, raises interest rates, and _____ the equilibrium level of aggregate output.
A) higher; reduces; raises B) higher; reduces; lowers
C) lower; increases; raises D) lower; increases; lowers
Answer: B
105) In Figure 23-1, the economy moves from point 1 to point 2 whenever
A) government spending increases.
B) investment expenditures unrelated to the interest rate increase.
C) taxes are reduced.
D) any of the above occur.
E) either (a) or (b) occur.
Answer: D
110) In Figure 23-1, the economy moves from point 3 to point 4 whenever
A) government spending declines.
B) taxes are increased.
C) the money supply declines.
D) any of the above occur.
E) either (a) or (b) occur.
Answer: E
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115) In Figure 23-1, the economy moves from point 3 to point 1 whenever
A) both government spending and the money supply increase.
B) both taxes and the money supply increase.
C) both government spending and taxes increase.
D) both government spending and the money supply decrease.
Answer: D