ChatGPT Questions

Question 1

The IS/LM model represents equilibrium in which two markets?

Answer 1

A. Goods market and Money market.

The IS curve comes from goods market equilibrium; the LM curve from money market equilibrium.

Question 2

A point on the IS curve represents:

Answer 2

A. Equilibrium where investment equals saving at a certain interest rate and output level.

By definition, IS is the set of (Y,i) where the goods market is in equilibrium.

Question 3

The LM curve shows combinations of income (Y) and interest rate (i) where:

Answer 3

B. Money demand equals money supply.

LM is the equilibrium in the money market.

Question 4

Why does the IS curve slope downward?

Answer 4

A. Lower interest rates stimulate investment, leading to higher income.

Investment is inversely related to interest, so lower i increases aggregate demand and income.

Question 5

The LM curve slopes upward because:

Answer 5

A. Higher income increases money demand, pushing interest rates up for a given money supply.

Thus, higher Y corresponds to higher i, giving LM an upward slope.

Question 6

Which of the following is an assumption of the basic IS/LM model?

Answer 6

A. The price level is fixed in the short run.

This is why IS/LM focuses on output and interest, not price changes.

Question 7

An increase in government spending, all else equal, will cause the IS curve to:

Answer 7

A. Shift to the right (outward).

Fiscal expansion shifts the IS outward.

Question 8

If the central bank decreases the money supply, the LM curve will:

Answer 8

A. Shift left/up (interest rates higher for each level of Y).

Less money means at any income level, interest rates must be higher to equilibrate money demand.

Question 9

In the IS/LM model, what is the short-run effect of an increase in government spending (with the money supply held constant)?

Answer 9

A. Higher output and higher interest rates.

G↑ shifts IS right: output rises; the IS-LM intersection moves up the LM curve, so interest rates also rise.

Question 10

In the IS/LM framework, an expansionary monetary policy (increase in money supply) will generally lead to:

Answer 10

A. Higher output and lower interest rates.

Ms↑ shifts LM right: the new intersection has a lower interest rate and higher income.

Question 11

The term “crowding out” in macroeconomics refers to:

Answer 11

A. Government deficit spending raising interest rates and thus reducing private investment.

This can partially offset the expansionary effect of fiscal policy.

Question 12

In a liquidity trap (where the LM curve is nearly flat horizontal at very low interest rates), an increase in the money supply will:

Answer 12

A. Have little to no effect on interest rates or output.

People hoard the extra money; monetary policy is ineffective.

Question 13

If investment is completely unresponsive to interest rates (the IS curve is vertical), what is the effect of monetary policy?

Answer 13

A. Monetary policy has no effect on output (only interest rates change).

Monetary policy can’t boost output because investment and consumption won’t increase when rates drop.

Question 14

Fiscal policy is most effective (has the largest impact on output) when:

Answer 14

A. The LM curve is flat (horizontal).

No crowding out by interest rates, hence very effective fiscal policy.

Question 15

Aggregate Demand (AD) in an economy is composed of:

Answer 15

A. C + I + G + X – M (Consumption + Investment + Government + Net Exports).

This is the aggregate expenditure identity for an open economy.

Question 16

The Aggregate Demand curve is downward sloping primarily because:

Answer 16

A. A lower price level increases real wealth and lowers interest rates, boosting spending.

These are the wealth and interest-rate effects.

Question 17

Which of the following will shift the Aggregate Demand curve to the right?

Answer 17

A. The central bank cuts interest rates.

A cut in interest rates is expansionary monetary policy.

Question 18

The Long-Run Aggregate Supply (LRAS) curve is:

Answer 18

A. Vertical at the full-employment level of output.

In the long run, output is determined by resources and technology, not the price level.

Question 19

The Short-Run Aggregate Supply (SRAS) curve is usually upward sloping because:

Answer 19

A. Some input prices (like wages) are sticky, so higher product prices improve profit margins and output rises.

This causes an upward-sloping SRAS.

Question 20

A large increase in oil prices will likely:

Answer 20

A. Shift the short-run aggregate supply (SRAS) curve to the left (decrease AS).

Output falls and the price level rises as a result.

Question 21

Which of the following would increase an economy’s long-run aggregate supply (LRAS)?

Answer 21

A. A technological innovation that boosts productivity.

Price level or demand changes don’t shift LRAS.

Question 22

In the short run, an unexpected increase in aggregate demand will tend to ______ output and ______ the price level. (Assume the economy starts below full capacity.)

Answer 22

A. increase output; increase the price level.

Firms produce more to meet higher demand, and some prices go up.

Question 23

In the long run, an increase in aggregate demand (AD) will tend to:

Answer 23

A. Increase the price level, but leave output unchanged (at its potential).

AD shifts only have a lasting impact on prices, not on real GDP, in the long run.

Question 24

What is the typical self-correcting mechanism when the economy is in a recession (output below full employment) with no policy intervention?

Answer 24

A. Falling wages and input prices over time will shift SRAS to the right, increasing output back toward potential.

This moves the economy back toward full employment, though it may be slow.

Question 25

Which of the following best characterizes the classical (pre-Keynesian) economic view?

Answer 25

A. Markets are self-correcting with flexible prices; the economy tends toward full employment on its own. ## Footnote They generally opposed active demand management by government.

Question 26

According to Keynesian theory, the level of output and employment is primarily determined by:

Answer 26

A. Aggregate demand (total spending) in the economy. ## Footnote Insufficient demand can cause unemployment and output below potential.

Question 27

In the Keynesian Cross (income-expenditure) model, equilibrium national income occurs when:

Answer 27

A. Total spending (AE) equals total output (Y). ## Footnote At that point, businesses are selling exactly what is produced.

Question 28

The Keynesian expenditure multiplier effect implies that:

Answer 28

A. An initial increase in spending leads to a larger total increase in GDP. ## Footnote Each dollar spent can raise GDP by multiple dollars as it circulates.

Question 29

Which of the following would reduce the size of the spending multiplier?

Answer 29

A. An increase in the marginal propensity to import (MPM). ## Footnote Any leakage – saving, taxes, or imports – reduces the multiplier.

Question 30

If the marginal propensity to consume (MPC) is 0.75 and there are no taxes or imports, the simple spending multiplier is:

Answer 30

A. 4. ## Footnote So a $100 increase in spending yields a $400 total increase in GDP in this simple model.

Question 31

If the government increases its spending by $100 billion and simultaneously raises taxes by $100 billion, what is the most likely effect on equilibrium GDP (assuming a typical Keynesian model)?

Answer 31

A. GDP increases by about $100 billion. ## Footnote This is the balanced budget multiplier = 1.

Question 32

If the government spends $100 billion and simultaneously raises taxes by $100 billion, what is the most likely effect on equilibrium GDP?

Answer 32

GDP rises by roughly the amount of the spending increase. ## Footnote This is the balanced budget multiplier = 1; the $100b in new spending directly boosts demand, while the $100b tax hike reduces consumption by less than $100b (because people reduce spending by MPC×$100b), so net effect is positive.

Question 33

Which of the following is an example of an automatic stabilizer in the economy?

Answer 33

Unemployment insurance benefits that increase as jobless rates rise. ## Footnote This is a classic automatic stabilizer.

Question 34

A countercyclical fiscal policy strategy would be to:

Answer 34

Increase government spending or cut taxes during a recession, and reduce spending or raise taxes during a boom. ## Footnote Countercyclical means acting against the cycle – stimulus in bad times, austerity in good times.

Question 35

If a country enacts austerity during a recession, this policy can be described as:

Answer 35

Procyclical fiscal policy. ## Footnote That’s procyclical – it reinforces the downturn (reducing demand when the economy is already weak).

Question 36

Automatic stabilizers differ from discretionary fiscal policy in that automatic stabilizers:

Answer 36

Work without new legislation, adjusting government taxing/spending in response to economic conditions. ## Footnote They automatically increase deficits in recessions and reduce deficits in booms.

Question 37

Which of the following is a tool of monetary policy?

Answer 37

Open market operations (buying/selling government bonds by the central bank). ## Footnote This is a key monetary policy instrument used by central banks to influence the money supply and interest rates.

Question 38

Who is responsible for setting monetary policy for the countries that use the euro?

Answer 38

The European Central Bank (ECB). ## Footnote Individual member countries like Ireland do not set their own monetary policy under the euro system.

Question 39

The primary objective of the European Central Bank’s monetary policy is:

Answer 39

Price stability (controlling inflation around a low target). ## Footnote The ECB’s main mandate is price stability (keep inflation low and stable).

Question 40

Which of the following is NOT an expansionary economic policy?

Answer 40

The central bank sells government bonds on the open market. ## Footnote The central bank selling bonds is a contractionary move (it pulls money out of circulation, raising interest rates).

Question 41

If inflation is too high and the economy is overheating, what combination of policies would help reduce inflationary pressure?

Answer 41

Contractionary fiscal policy and contractionary monetary policy. ## Footnote This combined policy mix will dampen demand and lower inflation, though it also slows growth.

Question 42

Gross Domestic Product (GDP) is best described as:

Answer 42

A flow concept measured over a period that sums up the recorded market value of all final goods and services produced domestically. ## Footnote It’s not a stock and it doesn’t count illegal/unrecorded activity.

Question 43

Which of the following is NOT included in calculating GDP?

Answer 43

Government social security/unemployment benefit payments. ## Footnote They are excluded from GDP since nothing new is produced in the transaction.

Question 44

Gross National Product (GNP) differs from GDP by:

Answer 44

Including net income earned by nationals abroad and excluding income earned by foreigners domestically. ## Footnote It attributes production by ownership/nationality rather than location.

Question 45

In the circular flow of income, which of the following is an injection into the economy?

Answer 45

Investment spending by firms on new capital. ## Footnote Investment is an injection (spending that adds to the flow of income).

Question 46

Which of the following is not one of the three equivalent ways to measure a country’s GDP?

Answer 46

Adding up all savings of individuals and firms. ## Footnote The three approaches are Expenditure approach, Income approach, and Output (value-added) approach.

Question 47

According to Keynes’ liquidity preference theory, the three motives for holding money are:

Answer 47

Transactions, Precautionary, and Speculative motives. ## Footnote These are reasons people hold money instead of other assets.

Question 48

The “impossible trinity” or Mundell-Fleming trilemma states that a country cannot simultaneously have:

Answer 48

A fixed exchange rate, independent monetary policy, and free capital mobility. ## Footnote All three cannot be had together.

Question 49

Which of the following is a leakage from the circular flow of income?

Answer 49

Savings by households. ## Footnote Savings is a leakage (income not spent on domestic output).

Question 50

The structural budget deficit is defined as:

Answer 50

The deficit that remains at full employment. ## Footnote It filters out cyclical effects, reflecting underlying fiscal stance.

Question 51

In the IS/LM model, monetary policy will have a stronger effect on output if:

Answer 51

The IS curve is relatively flat. ## Footnote A flat IS means a small drop in interest rates leads to a big increase in investment and output.