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Macroeconomics, 11e (Gordon)
Chapter 4 Monetary and Fiscal Policy in the IS-LM Model
6) The economy is in short-run equilibrium
A) at any point on the IS curve.
B) only at the natural level of GDP.
C) at any point on the LM curve.
D) only at a point that is on both the IS and LM curves.
Answer: D
Question Status: Previous Edition
7) Which of the following would shift the LM curve?
A) an increase in the tax rate
B) an increase in the real money supply
C) a reduction in business confidence
D) All of these.
Answer: B
Question Status: Previous Edition
15) Which of the following statements are true?
A) The smaller the responsiveness of money demand to a change in the interest rate, the steeper the LM
curve.
B) The larger the responsiveness of money demand to a change in the interest rate, the flatter the LM
curve.
C) If money demand is not responsive to a change in the interest rate, the LM curve will be horizontal.
D) Both A and B.
Answer: D
Question Status: Previous Edition
Figure 4-3
30) Employing Figure above, the initial equilibrium is point D and government expenditures increase by
________ shifting the IS curve from IS0 to IS1 and crowding out is approximately ________.
A) 500, 500
B) 250, 500
C) 1000, 1000
D) 1000, 250
Answer: B
Question Status: Previous Edition
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34) When the marginal propensity to save declines, the
A) multiplier becomes larger and the IS curve becomes flatter.
B) marginal propensity to consume increases and there is no effect on the IS curve.
C) multiplier becomes larger and the IS curve becomes steeper.
D) multiplier declines and the IS curve becomes steeper.
Answer: A
Question Status: Previous Edition
36) Which of the following would cause the IS curve to shift?
A) a change in the multiplier
B) a change in business or consumer confidence
C) an increase in autonomous tax revenue
D) all of these would shift the IS curve.
Answer: D
Question Status: Previous Edition
44) "Real money balances" refers to
A) the currency part of the total money supply.
B) the money supply divided by the price level.
C) the money supply times one minus the interest rate.
D) the non-interest-earning part of the money supply.
Answer: B
Question Status: Previous Edition
45) An increase in real GDP causes the demand for real money balances to
A) rise.
B) fall.
C) remain unaffected.
D) rise, fall, or remain unaffected depending on the interest rate at the time.
Answer: A
Question Status: Previous Edition
68) When the demand for money becomes less responsive to changes in income, the LM curve becomes ________
A) flatter,
C) steeper,
Answer: B
Figure 4-5
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70) In Figure 4-5, the commodity market is in equilibrium
A) at points B, C, and E.
B) at points A and E.
C) only at point E.
D) at points E and D.
E) at points A, B, E, and C.
Answer: B
Question Status: Previous Edition
71) In the figure above, the money market is in equilibrium
A) at points B, C, and E.
B) at points A and E.
C) only at point E.
D) at points E and D.
E) at points A, B, E, and C.
Answer: A
Question Status: Previous Edition
76) From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the
new IS-LM equilibrium we have some combination of a ________ income and a ________ interest rate.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower
Answer: C
Question Status: Previous Edition
78) Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending
takes us to a new equilibrium with ________ income and ________ interest rate.
A) higher, a higher
B) higher, a lower
C) an unchanged, a higher
D) an unchanged, a lower
E) lower, an unchanged
Answer: A
79) Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending
shifts the ________ by a horizontal distance equal to the change in government spending ________.
A) IS curve to the right, divided by the Chapter 3 multiplier
B) IS curve to the right, times the Chapter 3 multiplier
C) IS curve to the left, times the interest rate at the initial equilibrium
D) LM curve to the right, divided by the Chapter 3 multiplier
E) LM curve to the right, divided by the interest rate at the initial equilibrium
Answer: B
Question Status: Previous Edition
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81) With normally-sloped IS and LM curves, an increase in government spending ________ the interest rate,
which ________ autonomous planned expenditure, resulting in a final increase in income ________ than what
the government spending increase would have produced in the Chapter 3 model.
A) lowers, raises, greater
B) lowers, lowers, greater
C) raises, lowers, less
D) raises, raises, less
E) raises, raises, greater
Answer: C
Question Status:
Previous Edition
Figure 4-6
83) In the figure above, with IS0 shifting to IS1 against the upward-sloping LM curve, crowding-out is the result
that
A) income stays at YO3.
B) income rises to Y1 instead of to Y2.
C) income rises to Y1 instead of staying at YO3.
D) income rises to Y2 instead of to Y1.
Answer: D
Question Status: Previous Edition
84) In the figure above, with IS0 shifting to IS1 against the upward-sloping LM curve, at point 1
A) there is an excess demand for money.
B) there is an excess supply of money.
C) the demand for output exceeds Y1.
D) the demand for output is below Y1.
Answer: A
Question Status: Previous Edition
95) An increase in the marginal propensity to consume would cause the IS curve to
A) make a parallel shift to the right.
B) make a parallel shift to the left.
C) rotate to become steeper from its vertical intercept.
D) rotate to become flatter from its vertical intercept.
E) rotate to become flatter from its horizontal intercept.
Answer: D
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Figure 4-7
99) Using the information contained in the figure above, the initial equilibrium Y is 3500. If there is 500 of new
fiscal stimulus and a constant money supply, Y will increase to ________ and the interest rate will ________.
A) 4000; remain constant
B) 4000; rise to 10%
C) 4500; rise to 12.5%
D) 5500; remain constant
Answer: C
Question Status: Previous Edition
100) The "crowding-out" effect refers to the fact that
A) fiscal policy cannot be used to shift the IS curve.
B) rising interest rates tend to accompany an expansionary fiscal policy.
C) there may be a liquidity trap.
D) All of these.
Answer: B
Question Status: Previous Edition
101) Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money
supply by $100 billion. We definitely know that
A) equilibrium GDP will fall.
B) equilibrium GDP will rise.
C) the interest rate will rise.
D) the interest rate will fall.
Answer: C
Question Status: Previous Edition
102) The effect on the IS curve of a reduction in taxes will be less the
A) flatter is the LM curve.
B) steeper is the LM curve.
C) greater the extent of "crowding out."
D) greater is the marginal propensity to save.
Answer: D
Question Status: Previous Edition
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107) For a given level of equilibrium GDP, a tight-money/easy-fiscal policy mix compared with easy-money/tightfiscal policy mix implies a
A) lower interest rate.
B) lower level of investment.
C) higher level of taxation.
D) lower level of government expenditures.
Answer: B
Question Status: Previous Edition
109) If the IS curve is negatively sloped and the LM curve is positively sloped
A) an increase in government expenditures will raise real GDP and lower interest rates.
B) a fall in the real money supply will raise real GDP and lower the interest rate.
C) an increase in taxes and an increase in money supply will lower the interest rate and give little or no
change in real GDP.
D) an increase in taxes and a fall in the money supply will raise the interest rate and give little or no
change in real GDP.
Answer: C
Question Status: Previous Edition
113) Monetary restraint and fiscal stimulus will
A) both lower the real rate of interest.
B) both raise the real rate of interest.
C) have differing effects on the real rate of interest.
D) Both raise the level of output.
Answer: B
Question Status: Previous Edition
118) A steep LM curve implies that
A) an increase in government spending will change output by a relatively small amount.
B) a decrease in taxes will change output by a relatively small amount.
C) changes in government spending and taxes will have a large multiple effect on output.
D) A and B.
Answer: D
Question Status: Previous Edition
120) A steep IS curve implies that
A) an increase in money supply will change output by a relatively small amount.
B) a decrease in taxes will change output by a relatively small amount.
C) changes in money supply will have large multiplier effects on output.
D) A and B.
Answer: A
Question Status: Previous Edition
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122) Monetary policy will have a large income effect provided the
A) IS curve is flat.
B) LM curve is steep.
C) IS curve is steep.
D) LM curve is flat.
Answer: A
Question Status: Previous Edition
123) Monetary policy will have a large income effect provided the
A) sensitivity of autonomous spending to interest rates is high.
B) sensitivity of autonomous spending to interest rates is low.
C) sensitivity of output changes to interest rates is small.
D) None of the above.
Answer: A
Question Status: Previous Edition
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