Chapter 11 Flashcards by booey baba

The interaction of the IS curve and the LM curve together determine:

the price level and the inflation rate.
the interest rate and the price level.
investment and the money supply.
the interest rate and the level of output.

the interest rate and the level of output.

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In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case, the
interest rate ______ and output ______.

rises; falls
rises; rises
falls; rises
falls; falls

rises; rises

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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.

decrease; decrease; decrease; decrease
increases; increase; increases; increase
decrease; decrease; increase; increase
increase; increase; decrease; decrease

decrease; decrease; decrease; decrease

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In the IS-LM model, the impact of an increase in government purchases in the goods market has
ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

increase; supply
increase; demand
decrease; supply
decrease; demand

increase; demand

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In the IS-LM model when taxation increases, in short-run equilibrium, in the usual case, the interest rate
______ and output ______.

rises; falls
rises; rises
falls; rises
falls; falls

falls; falls

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If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium
income rises by:

G/(1 – MPC).
more than zero but less than G/(1 – MPC).
G.
zero.

zero.

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If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given
interest rate shifts to the right by:

100.
200.
300.
400.

400.

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If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the
IS curve for any given interest rate shifts to the right by:

100.
200.
300.
400.

300.

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

prices.
investment.
the money supply.
taxes.

investment.

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The increase in income in response to a fiscal expansion in the IS-LM model is:

always less than in the Keynesian-cross model.
less than in the Keynesian-cross model unless the LM curve is vertical.
less than in the Keynesian-cross model unless the LM curve is horizontal.
less than in the Keynesian-cross model unless the IS curve is vertical.

less than in the Keynesian-cross model unless the LM curve is horizontal.

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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.

larger than the multiplier
the same as the multiplier
smaller than the multiplier
sometimes larger and sometimes smaller than the multiplier

smaller than the multiplier

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The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in
the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion
raises the interest rate and crowds out investment.

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion
lowers the interest rate and crowds out investment.

investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher
investment, which raises the interest rate.

the price level is fixed whereas in the IS-LM model it is allowed to vary.

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion
raises the interest rate and crowds out investment.

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In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption.
investment.
government spending.
the interest rate.

consumption.

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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.

less than
greater than
equal to
sometimes less and sometimes greater than

less than

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If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

LM; left
LM; right
IS; left
IS; right

LM; right

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

rises; falls
rises; rises
falls; rises
falls; falls

falls; rises

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In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the
interest rate ______ and output ______.

rises; falls
rises; rises
falls; rises
falls; falls

falls; rises

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In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the
interest rate ______ and output ______.

rises; falls
rises; rises
falls; rises
falls; falls

rises; falls

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If the demand for real money balances does not depend on the interest rate, then the LM curve:

slopes up to the right.
slopes down to the right.
is horizontal.
is vertical.

is vertical.

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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.

buy; rises; increase
sell; falls; decrease
sell; rises; decrease
buy; rises; decrease

sell; rises; decrease

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The monetary transmission mechanism works through the effects of changes in the money supply on:

the budget deficit.
investment.
government expenditures.
taxation.

investment.

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The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money
supply increases the demand for goods and services:

directly.

by lowering the interest rate so that investment spending increases.

by raising the interest rate so that investment spending increases.

by increasing government spending on goods and services.

by lowering the interest rate so that investment spending increases.

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If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed
held the money supply constant, then the two policies together would generally lead to ______ income and
a ______ interest rate.

lower; lower
lower; higher
no change in; lower
no change in; higher

lower; lower

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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.

increase
decrease
first increase and then decrease
first decrease and then increase

decrease

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According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply. increase decrease first increase and then decrease first decrease and then increase

increase

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then: both consumption and investment remain unchanged. consumption rises but investment falls. investment rises but consumption falls. both consumption and investment fall.

investment rises but consumption falls.

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant. less than half as great as approximately equal to more than two times as great as more than three times as great as

more than three times as great as

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about: zero. $25 billion. $75 billion. $100 billion.

$25 billion.

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. increase; lower increase; raise lower; lower lower; raise

increase; raise

An increase in consumer saving for any given level of income will shift the: LM curve upward and to the left. LM curve downward and to the right. IS curve downward and to the left. IS curve upward and to the right.

IS curve downward and to the left.

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. increase; lower increase; raise lower; lower. lower; raise

lower; raise

In the IS-LM model, a decrease in the interest rate would be the result of a(n): increase in the money supply. increase in government purchases. decrease in taxes. increase in money demand.

increase in the money supply.

In the IS-LM model, a decrease in output would be the result of a(n): decrease in taxes. increase in the money supply. increase in money demand. increase in government purchases.

increase in money demand.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the \_\_\_\_\_\_. LM; right LM; left IS; right IS; left

IS; left

One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the \_\_\_\_\_\_. LM; right LM; left IS; right IS; left

LM; right

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left. buy; IS buy; LM sell; IS sell; LM

sell; LM

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right. buy; IS buy; LM sell; IS sell; LM

buy; LM

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: lower; raises; reduces higher; lowers; increases lower; lowers; increases higher; raises; reduces

lower; raises; reduces

An economic change that does not shift the aggregate demand curve is a change in: the money supply. the investment function. the price level. taxes.

the price level.

A change in income in the IS-LM model for a fixed price level: represents a shift in the aggregate demand curve. represents a movement along the aggregate demand curve. 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. does not represent a change in the aggregate demand curve.

represents a shift in the aggregate demand curve.

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve \_\_\_\_\_\_. IS; shifts to the right IS; does not shift LM: shifts to the right LM; does not shift

LM: shifts to the right

A tax cut shifts the ______ to the right, and the aggregate demand curve \_\_\_\_\_\_. IS; shifts to the right IS; does not shift LM: shifts to the right LM; does not shift

IS; shifts to the right

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve \_\_\_\_\_\_. IS; shifts to the right IS; does not shift LM: shifts to the right LM; does not shift

LM; does not shift

A change in income in the IS-LM model resulting from a change in the price level represents a \_\_\_\_\_\_ aggregate demand curve, while a change in income in the IS-LM model for a given price level represents a \_\_\_\_\_\_ aggregate demand curve. movement along the; shift in the shift in the; movement along the vertical; horizontal horizontal; vertical

movement along the; shift in the

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 \_\_\_\_\_\_. resulting from a change in monetary policy; resulting from a change in fiscal policy resulting from a change in fiscal policy; resulting from a change in monetary policy at a given price level; resulting from a change in the price level resulting from a change in the price level; at a given price level

resulting from a change in the price level; at a given price level

A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium. increase both output and the price level decrease output but increase prices increase output but decrease the price level decrease both output and the price level

decrease output but increase prices

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will \_\_\_\_\_\_, shifting the ______ curve to the right and returning output to the natural level. increase; IS decrease; IS increase; LM decrease; LM

decrease; LM

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. price level; increase interest rate; decrease money supply; increase consumption function; decrease

price level; increase

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that \_\_\_\_\_\_. output is fixed; prices are fixed prices are fixed; output is fixed the interest rate is fixed; the money supply is fixed prices are flexible; output varies

prices are fixed; output is fixed

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in \_\_\_\_\_\_. classical; both the short and long runs Keynesian; both the short and long runs classical; the short run whereas the Keynesian assumptions are most appropriate in the long run Keynesian; the short run whereas the classical assumptions are most appropriate in the long run

Keynesian; the short run whereas the classical assumptions are most appropriate in the long run

The spending hypothesis suggests that the Great Depression was caused by a: leftward shift in the IS curve. rightward shift in the IS curve. leftward shift in the LM curve. rightward shift in the LM curve.

leftward shift in the IS curve.

The money hypothesis suggests that the Great Depression was caused by a: leftward shift in the IS curve. rightward shift in the IS curve. leftward shift in the LM curve. rightward shift in the LM curve.

leftward shift in the LM curve.

The Pigou effect: suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more. suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more. is generally accepted as adequate proof that the economy must be able to correct itself.

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.

The Pigou effect suggests that falling prices will increase income because real balances influence \_\_\_\_\_\_ and will shift the ______ curve. money demand; LM the money supply; LM consumer spending; IS government spending; IS

consumer spending; IS

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, than a fall in the price level will shift: only the LM curve. only the IS curve. both the LM and the IS curves. neither the LM nor the IS curves.

both the LM and the IS curves.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, than a fall in the price level will result in higher income and: higher interest rates. lower interest rates. no change in interest rates. either higher, lower, or unchanging interest rates.

either higher, lower, or unchanging interest rates.

The debt-deflation theory of the Great Depression suggests that a(n) ______ deflation redistributes wealth in such a way as to ______ spending on goods and services. unexpected; reduce unexpected; increase expected; reduce expected; increase

unexpected; reduce

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______ and that creditors have ______ propensity to consume than debtors. from debtors to creditors; a smaller from debtors to creditors; a larger from creditors to debtors; a smaller from creditors to debtors; a larger

from debtors to creditors; a smaller

An unexpected deflation can change demand by redistributing wealth from: creditors to debtors, thus raising consumption. creditors to debtors, thus lowering consumption. debtors to creditors, thus lowering consumption. debtors to creditors, thus raising consumption.

debtors to creditors, thus lowering consumption.

Possible explanations put forth for the Great Depression do not include: a shift in the IS curve. a shift in the LM curve. the debt-deflation theory. the Pigou effect.

the Pigou effect.

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate. real; real nominal; nominal real; nominal nominal; real

real; nominal

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the: IS curve shifts leftward. IS curve shifts rightward. LM curve shifts leftward. LM curve shifts rightward.

LM curve shifts rightward.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines. lowers; raises raises; lowers raises; raises lowers; lowers

lowers; raises

In the IS-LM model, a decrease in expected inflation (an increase in expected deflation), leads to a(n): increase in both output and the nominal interest rate. decrease in both output and the nominal interest rate. increase in output and a decrease in the nominal interest rate. decrease in output and an increase in the nominal interest rate.

decrease in both output and the nominal interest rate.

Other things equal, an expected deflation can change demand by: lowering the demand for money, thus shifting the LM curve. increasing the demand for money, thus shifting the LM curve. raising the real interest rate for any given nominal interest rate, thus reducing desired investment. lowering the real interest rate for any given nominal interest rate, thus increasing desired investment.

raising the real interest rate for any given nominal interest rate, thus reducing desired investment.

During the financial crisis of 2008–09, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): expansionary shift in the IS curve. contractionary shift in the IS curve. expansionary shift in the LM curve. contractionary shift in the LM curve.

contractionary shift in the IS curve.

All of the following may have contributed to the financial crisis and economic downturn of 2008–09 except: high inflation. low interest rates. stock market volatility. falling house prices.

high inflation.

Most economists believe: the Great Depression is very likely to be repeated. it is likely that the money supply might again fall by one-fourth, but that fiscal policy would be expansionary enough in this case to avoid a Great Depression. it is unlikely that the money supply might fall again by one-fourth, but it is likely that fiscal policy might be so contractionary as to cause a Great Depression. in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

A liquidity trap occurs when: banks have too much currency and close their doors to new customers. the central bank mistakenly prints too much money, generating hyperinflation. interest rates fall so low that monetary policy is no longer effective. dams and locks are built to prevent flooding.

interest rates fall so low that monetary policy is no longer effective.

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels. monetary; high monetary; low fiscal; high fiscal; low

monetary; low

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent. 4 1 0 –2

–2

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the: larger the level of government spending. smaller the level of government spending. greater the sensitivity of investment spending to the interest rate. smaller the sensitivity of investment spending to the interest rate.

smaller the sensitivity of investment spending to the interest rate.

The slope of the IS curve depends on: the interest sensitivity of investment and the amount of government spending. the interest sensitivity of investment and the marginal propensity to consume. the interest sensitivity of investment and the tax rates. tax rates and government spending.

the interest sensitivity of investment and the marginal propensity to consume.

A given increase in taxes shifts the IS curve more to the left the: larger the marginal propensity to consume. smaller the marginal propensity to consume. larger the government spending. smaller the government spending.

larger the marginal propensity to consume.

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand. greater; greater greater; smaller smaller; smaller smaller; greater

smaller; greater

If the demand function for money is M/P = 0.5Y – 100r, then the slope of the LM curve is: 0. 001. 0. 005. 0. 01. 0. 05.

0.005.

If the demand function for money is M/P = 0.5Y – 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the: left by 100. left by 200. right by 100. right by 200.

right by 200.

Other things equal, a given change in government spending has a larger effect on demand the: flatter the LM curve. steeper the LM curve. smaller the interest sensitivity of money demand. larger the income sensitivity of money demand.

flatter the LM curve.

Other things equal, a given change in government spending has a larger effect on demand the: flatter the IS curve. steeper the IS curve. larger the interest sensitivity of expenditure demand. smaller the interest sensitivity of money demand.

steeper the IS curve.

Other things equal, a given change in money supply has a larger effect on demand the: flatter the IS curve. steeper the IS curve. smaller the interest sensitivity of expenditure demand. smaller the income sensitivity of expenditure demand.

flatter the IS curve.

Other things equal, a given change in money supply has a larger effect on demand the: larger the income sensitivity of money demand. smaller the income sensitivity of money demand. flatter the LM curve. steeper the IS curve.

smaller the income sensitivity of money demand.

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output. horizontal; fiscal vertical; fiscal horizontal; monetary vertical; monetary

vertical; fiscal

If money demand is infinite below some certain r (e.g., r\*) and zero above r\*, then the LM curve is \_\_\_\_\_\_ and ______ policy has no effect on output. vertical; fiscal horizontal; fiscal vertical; monetary horizontal; monetary

horizontal; monetary

If investment demand is infinite below some certain r (e.g., r\*\*) and zero above r\*\*, then the IS curve is \_\_\_\_\_\_ and ______ policy has no effect on output. vertical; monetary horizontal; monetary vertical; fiscal horizontal; fiscal

horizontal; fiscal

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 \_\_\_\_\_\_. large; small small; small small; large large; large

small; large

If the investment demand function is I = c – dr and the quantity of real money demanded is eY – fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is \_\_\_\_\_\_. large; small small; also small small; large large; also large

large; small

Those economists who believe that fiscal policy is more potent than monetary policy argue that the: responsiveness of investment to the interest rate is small. responsiveness of investment to the interest rate is large. IS curve is nearly horizontal. LM curve is nearly vertical.

responsiveness of investment to the interest rate is small.

Those economists who believe that monetary policy is more potent than fiscal policy argue that the responsiveness of money demand to the interest rate is large. responsiveness of money demand to the interest rate is small. IS curve is nearly vertical. LM curve is nearly horizontal.

responsiveness of money demand to the interest rate is small.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: income, the interest rate, consumption, and investment are unchanged. income and the interest rate rise, whereas consumption and investment fall. income and the interest rate fall, whereas consumption and interest rise. income, the interest rate, consumption, and investment all rise.

income and the interest rate rise, whereas consumption and investment fall.

If consumption is given by C = 200 + 0.75(Y – T) and investment is given by I = 200 – 25r, then the formula for the IS curve is: ``` Y = 400 – 0.75T – 25r + G. Y = 1,600 – 3T – 100r + 4G. Y = 400 + 0.75T – 25r – G. Y = 1,600 + 3T – 100r – 4G. ```

Y = 1,600 – 3T – 100r + 4G.

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: ``` Y = 1,100, r = 6 percent. Y = 1,200, r = 5 percent. Y = 1,000, r = 5 percent. Y = 1,100, r = 5 percent. ```

Y = 1,100, r = 6 percent.

If the IS curve is given by Y = 1,700 – 100r, the money demand function is given by (M/P)d = Y – 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by: 200 and the interest rate falls by 2 percent. 100 and the interest rate falls by 1 percent. 50 and the interest rate falls by 0.5 percent. 200 and the interest rate remains unchanged.

50 and the interest rate falls by 0.5 percent.

If investment does not depend on the interest rate, then the ______ curve is \_\_\_\_\_\_. IS; vertical IS; horizontal LM; vertical LM; horizontal

IS; vertical

If money demand does not depend on income, then the ______ curve is \_\_\_\_\_\_. IS; vertical IS; horizontal LM; vertical LM; horizontal

LM; horizontal

If money demand is extremely sensitive to the interest rate, then the ______ curve is \_\_\_\_\_\_. ## Footnote **IS; vertical IS; horizontal LM; vertical LM; horizontal**

LM; horizontal

If the government wants to raise investment but keep output constant, it should: adopt a loose monetary policy but keep fiscal policy unchanged. adopt a loose monetary policy and a loose fiscal policy. adopt a loose monetary policy and a tight fiscal policy. keep monetary policy unchanged but adopt a tight fiscal policy.

adopt a loose monetary policy and a tight fiscal policy.

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a: rise in the real interest rate and a fall in investment. fall in the real interest rate and a rise in investment. rise in both the real interest rate and investment. fall in both the real interest rate and investment.

rise in the real interest rate and a fall in investment

An increase in the money supply: increases income and lowers the interest rate in both the short and long runs. increases income in both the short and long runs, but leaves the interest rate unchanged in the long run. lowers the interest rate in both the short and long runs, but leaves income unchanged in the long run. lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

owers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

An increase in government spending raises income: and the interest rate in the short run, but leaves both unchanged in the long run. in the short run, but leaves it unchanged in the long run, while lowering investment. in the short run, but leaves it unchanged in the long run, while lowering consumption. and the interest rate in both the short and long runs.

in the short run, but leaves it unchanged in the long run, while lowering investment.

An increase in taxes lowers income: and the interest rate in the short run, but leaves both unchanged in the long run. in the short run, but leaves it unchanged in the long run, while increasing consumption and lowering investment. in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment. and the interest rate in both the short and long runs.

in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment.