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Exam 12: Aggregate Demand Ii: Applying the Islm Model

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Question 41

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An increase in consumer saving for any given level of income will shift the:

A) LM curve upward and to the left.
B) LM curve downward and to the right.
C) IS curve downward and to the left.
D) IS curve upward and to the right.

E) A) and B)
F) B) and D)

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Question 42

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An increase in the money supply:

A) increases income and lowers the interest rate in both the short run and in the long run.
B) increases income in both the short run and in the long run but leaves the interest rate unchanged in the long run.
C) lowers the interest rate in both the short run and in the long run but leaves income unchanged in the long run.
D) lowers the interest rate and increases income in the short run but leaves both unchanged in the long run.

E) A) and B)
F) C) and D)

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Question 43

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One policy response to an economic slowdown is to cut taxes. This policy response can be represented in the IS-LM model by shifting the _____ curve to the _____.

Assume the following model of the economy, with the price level fixed at 1.0: ​ ​ C = 0.8(Y - T) T = 1,000 ​ I = 800 - 20r G = 1,000 ​ Y = C + I + G M^s / P = M^d / P = 0.4Y - 40r ​ M^s = 1,200 ​ ​ a.Write a formula for the IS curve, showing Y as a function of r alone.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

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

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out:

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____.

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _____.

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 Keynesian-cross analysis.

The Pigou effect suggests that falling prices will increase income because real balances influence _____ and will shift the _____ curve.

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Economists who believe that fiscal policy is more potent than monetary policy argue that the:

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.

The interaction of the IS curve and the LM curve determines:

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.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

Exhibit: Policy Interaction Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂, then in order to keep output constant, the Bank of Canada should _____ the money supply, shifting to _____.

How can the Bank of Canada keep the economy from falling into a recession if the budget deficit is reduced? Use the IS-LM model to illustrate graphically the impact of both the fiscal policy reducing the deficit and the monetary policy, which prevents output from falling. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.