1. 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.
Use the following to answer question 2.
Exhibit: IS–LM Fiscal Policy
2. (Exhibit: IS–LM Fiscal Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, a decrease in government spending would generate
the new equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
3. In the IS–LM model, a decrease in government purchases leads to a(n) ______ in
planned expenditures, a(n) ______ in total income, a(n) ______ in money demand,
and a(n) ______ in the equilibrium interest rate.
A) decrease; decrease; decrease; decrease
B) increase; increase; increase; increase
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease
4. 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.
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
5. In the IS–LM analysis, the increase in income resulting from a tax cut is usually
______ the increase in income resulting from an equal rise in government spending.
A) less than
B) greater than
C) equal to
D) sometimes less and sometimes greater than
Use the following to answer questions 6-7.
Exhibit: IS–LM Monetary Policy
6. (Exhibit: IS–LM Monetary Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, a decrease in the money supply would generate the
new equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
7. (Exhibit: IS–LM Monetary Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, an increase in the money supply would generate the
new equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
8. In the IS–LM model when the Federal Reserve decreases the money supply, people
______ bonds and the interest rate ______, leading to a(n) ______ in investment
and income.
A) buy; rises; increase
B) sell; falls; decrease
C) sell; rises; decrease
D) buy; rises; decrease
Use the following to answer questions 9-10.
Exhibit: Policy Interaction
9. (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 the interest rate constant, the Federal
Reserve should _____ the money supply shifting to _____.
A) increase; LM2
B) decrease; LM2
C) increase; LM3
D) decrease; LM3
10. (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 and the Federal Reserve does not change the money supply,
the new equilibrium combination of interest and income will be _____.
A) r1, Y2
B) r2, Y3
C) r3, Y3
D) r3, Y4
11. In the IS–LM model, a decrease in output would be the result of a(n):
A) decrease in taxes.
B) increase in the money supply.
C) increase in money demand.
D) increase in government purchases.
12. When bond traders for the Federal Reserve seek to decrease interest rates, they
______ bonds, which shifts the ______ curve to the right.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM
13. A change in income in the IS–LM model for a fixed price
A) represents a shift in the aggregate demand curve.
B) represents a movement along the aggregate demand curve.
C) has the same effect on the aggregate demand curve as a change in income in the IS–
LM model resulting from a change in the price level.
D) does not represent a change in the aggregate demand curve.
14. A change in income in the IS–LM model resulting from a change in the price level is
represented by a ______ aggregate demand curve, while a change in income in the
IS–LM model for a given price level is represented by a ______ aggregate demand
curve.
A) movement along the; shift in the
B) shift in the; movement along the
C) vertical; horizontal
D) horizontal; vertical
Use the following to answer question 15.
Exhibit: IS–LM to Aggregate Demand
15. (Exhibit: IS–LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2
because the money supply decreases from M3 to M2 then, holding other factors
constant:
A) the aggregate demand curve will shift to the right.
B) the aggregate demand curve will shift to the left.
C) this represents a movement up the aggregate demand curve.
D) this represents a movement down the aggregate demand curve.
16. If the short-run IS–LM equilibrium occurs at a level of income above the natural level
of output, in the long run the ______ will ______ in order to return output to the
natural level.
A) price level; increase
B) interest rate; decrease
C) money supply; increase
D) consumption function; decrease
Use the following to answer question 17.
Exhibit: Short Run to Long Run
17. (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
18. If real money balances enter the IS–LM model both through the theory of liquidity
preference and the Pigou effect, then a fall in the price level will result in higher
income and:
A) higher interest rates.
B) lower interest rates.
C) no change in interest rates.
D) either higher, lower, or unchanging interest rates.
19. An unexpected deflation can change demand by redistributing wealth from:
A) creditors to debtors, thus raising consumption.
B) creditors to debtors, thus lowering consumption.
C) debtors to creditors, thus lowering consumption.
D) debtors to creditors, thus raising consumption.
20. If expected inflation equals 3 percent and monetary policymakers push the nominal
interest rate to 1 percent, the real interest rate equals ______ percent.
A) 4
B) 1
C) 0
D) –2
Answer Key - Untitled Exam-1
1. D
2. B
3. A
4. C
5. A
6. A
7. D
8. C
9. A
10. B
11. C
12. B
13. A
14. A
15. B
16. A
17. B
18. D
19. C
20. D