homework 4

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homework 4

Quiz: homework 4
Page 1 of 9
homework 4
1. According to classical theory, national income depends on ______, while Keynes proposed that
______ determined the level of national income.
A. aggregate demand; aggregate supply
B. aggregate supply; aggregate demand
C. monetary policy; fiscal policy
D. fiscal policy; monetary policy
Answer: B
2. Exhibit: Keynesian Cross
Reference: Ref 11-1
(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:
A. Y1 and PE1.
B. Y2 and PE2.
C. Y3 and PE3.
D. Y3 and PE4.
Answer: B
3. In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government
spending increases the equilibrium level of income by ______.
A. $1 billion
B. $0.75 billion
C. $3 billion
D. $4 billion
Answer: D
4. In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:
A. increases the amount of money in the economy.
B. changes income, which changes consumption, which further changes income.
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C. is government spending and, therefore, more powerful than private spending.
D. changes the interest rate.
Answer: B
5. According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then
a rise in taxes of ΔT will:
A. decrease equilibrium income by ΔT.
B. decrease equilibrium income by ΔT/(1 – MPC).
C. decrease equilibrium income by (ΔT)(MPC)/(1 – MPC).
D. not affect equilibrium income at all.
Answer: C
6. Based on the Keynesian model, one reason to support government spending increases over tax
cuts as measures to increase output is that:
A. government spending increases the MPC more than tax cuts.
B. the government-spending multiplier is larger than the tax multiplier.
C. government-spending increases do not lead to unplanned changes in inventories, but tax
cuts do.
D. increases in government spending increase planned spending, but tax cuts reduce planned
spending.
Answer: B
7. Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 +
0.6(Y – T). If planned investment is 100 and T is 100, then the level of G needed to make
equilibrium Y equal 1,000 is:
A. 200.
B. 240.
C. 250.
D. 260.
Answer: D
8. An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of
investment ______, and this shifts the expenditure function ______, thereby decreasing income.
A. increases; downward
B. increases; upward
C. decreases; upward
D. decreases; downward
Answer: D
9. The theory of liquidity preference implies that, other things being equal, an increase in the real
money supply will:
A. lower the interest rate.
B. raise the interest rate.
C. have no effect on the interest rate.
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D. first lower and then raise the interest rate.
Answer: A
10. An explanation for the slope of the LM curve is that as:
A. the interest rate increases, income becomes higher.
B. the interest rate increases, income becomes lower.
C. income rises, money demand rises, and a higher interest rate is required.
D. income rises, money demand rises, and a lower interest rate is required.
Answer: C
11. An LM curve shows combinations of:
A. taxes and government spending.
B. nominal money balances and price levels.
C. interest rates and income, which bring equilibrium in the market for real money balances.
D. interest rates and income, which bring equilibrium in the market for goods and services.
Answer: C
12. Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment
function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.
What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G in the
equation Y = C + I + G and then write an equation for Y as a function of r or r as a
function of Y.) (Note: this short answer question is not graded.)
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Answer:
Y = 2,800 – 400r or r = 7 – 0.0025Y.
13. In the question above, what is the slope of the IS curve?
A. -0.0025
B. -0.025
C. 0.025
D. 0.0025
Answer: A
14. In the question above, if the level of G rises, how does this shift the IS curve?
A. right (and up)
B. left (and down)
C. it does not shift
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Answer: A
15. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and
M/P equals 800.
Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.
(Hint: Write the LM curve only relating Y and r; substitute out M/P.) (Note: this short
answer question is not graded.)
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Answer:
Y = 1,600 + 200r, or r = –8 + 0.005Y.
16. In the question above, what is the slope of the LM curve?
A. 0.05
B. 0.005
C. -0.05
D. -0.005
Answer: B
17. In the question above, if M rises (and P remains fixed at P=1) how does the LM curve shift?
A. it shifts right (down)
B. it shifts left (up)
C. it does not shift
Answer: A
18. Using together the IS and LM equations you derived above, the equilibrium value of the interest
rate is ____ and the equilibrium value of output is ____.
A. 1, 2400
B. 2, 2400
C. 1, 2000
D. 2, 2000
Answer: D
19. Suppose now that the money supply is raised from 800 to 1100 in the economy described in the
questions above. Assuming price is still fixed at P=1, the IS and new LM curve imply that the new
equilibrium value of the interest rate is ____, and the new equilibrium value of output is ____.
A. 1, 2400
B. 2, 2400
C. 1, 1600
D. 2, 1600
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Answer: A
20. The interaction of the IS curve and the LM curve together determine:
A. the price level and the inflation rate.
B. the interest rate and the price level.
C. investment and the money supply.
D. the interest rate and the level of output.
Answer: D
21. In the IS–LM model when taxation increases, in short-run equilibrium, the interest rate ______
and output ______.
A. rises; falls
B. rises; rises
C. falls; rises
D. falls; falls
Answer: D
22. Using the IS–LM analysis, if the LM curve is not horizontal, the multiplier for an increase in
government spending is ______ for an increase in government purchases using the Keynesiancross analysis.
A. larger than the multiplier
B. the same as the multiplier
C. smaller than the multiplier
D. sometimes larger and sometimes smaller than the multiplier
Answer: C
23. 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: D
24. According to the IS–LM model, if Congress raises taxes but the Fed wants to hold the interest rate
constant, then the Fed must ______ the money supply.
A. increase
B. decrease
C. first increase and then decrease
D. first decrease and then increase
Answer: B
25. An increase in investment demand for any given level of income and interest rates—due, for
example, to more optimistic “animal spirits”—will, within the IS–LM framework, ______ output
and ______ interest rates.
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A. increase; lower
B. increase; raise
C. lower; lower
D. lower; raise
Answer: B
26. An increase in the demand for money, at any given income level and level of interest rates, will,
within the IS–LM framework, ______ output and ______ interest rates.
A. increase; lower
B. increase; raise
C. lower; lower.
D. lower; raise
Answer: D
27. The aggregate demand curve generally slopes downward and to the right because, for any given
money supply M a higher price level P causes a ______ real money supply M/P, which ______ the
interest rate and ______ spending.
A. lower; raises; reduces
B. higher; lowers; increases
C. lower; lowers; increases
D. higher; raises; reduces
Answer: A
28. An increase in the money supply 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: C
29. Exhibit: Short Run to Long Run
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Reference: Ref 12-5
(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term
equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.
A. B; higher
B. B; lower
C. C; higher
D. C; lower
Answer: B
30. When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS
curve will be steeper the:
A. larger the level of government spending.
B. smaller the level of government spending.
C. greater the sensitivity of investment spending to the interest rate.
D. smaller the sensitivity of investment spending to the interest rate.
Answer: D
31. The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the
effect of income on money demand.
A. greater; greater
B. greater; smaller
C. smaller; smaller
D. smaller; greater
Answer: D
32. Other things equal, a given change in money supply has a larger effect on demand the:
A. flatter the IS curve.
B. steeper the IS curve.
C. smaller the interest sensitivity of expenditure demand.
D. larger the income sensitivity of money demand.
Answer: A
33. If the investment demand function is I = c – dr and the quantity of real money demanded is eY –
fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is
______.
A. large; small
B. small; small
C. small; large
D. large; large
Answer: C
34. Those economists who believe that monetary policy is more potent than fiscal policy argue that
the:
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A. responsiveness of money demand to the interest rate is large.
B. responsiveness of money demand to the interest rate is small.
C. IS curve is nearly vertical.
D. LM curve is nearly horizontal.
Answer: B
35. Many people believe Europe has recently experienced a recession due to its policy of fiscal
austerity. In the next several questions, use the IS-LM / AS-AD model to analyze the short run
and long run effects of a permanent fall in government spending. (Note that in an exam, you
would also be asked to provide a graph and verbal explanation.) What is the short run effect of a
permanent cut in government spending on the interest rate:
A. rise
B. fall
C. no change
D. need more information to know
Answer: B
36. In the scenario above, what is the short run effect of a permanent cut in government spending on
investment:
A. rise
B. fall
C. no change
Answer: A
real money demand:
A. rise
B. fall
C. no change
D. need more money to know
Answer: C
nominal GDP:
A. rise
B. fall
C. no change
Answer: B
39. Considering now the long-run effect of a permanent cut in government spending, which of the
following variables returns in the long run to its initial value before the change in government
spending?
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A. both interest rate and investment
B. neither interest rate nor investment
C. just interest rate
D. just investment
Answer: B
40. Considering the long-run effect of the permanent cut in government spending, which of the
following variables returns in the long run to its initial value before the change in government
spending:
A. both real GDP and nominal GDP
B. neither real GDP nor nominal GDP
C. just real GDP
D. just nominal GDP
Answer: C

homework 4

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