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Exam 10: Aggregate Demand I: Building the Is-Lm Model

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Question 41

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In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

A) planned spending.
B) the interest rate.
C) production.
D) the price level.

E) A) and B)
F) All of the above

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Question 42

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An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

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

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

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Question 43

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According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

The LM curve shows combinations of that are consistent with equilibrium in the market for real money balances:

The Keynesian cross shows:

The IS-LM model is generally used:

When Paul Volcker tightened the money supply:

During a recession, consumers may want to save more to provide themselves with a reserve to cushion possible job losses. Use the Keynesian model to describe the impact of an exogenous decrease in consumption (a decrease in C) on the equilibrium level of income in the economy. Will aggregate national saving increase?

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

According to the Keynesian-cross analysis, when there is a shift upward in the government- purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

According to the theory of liquidity preference, the supply of nominal money balances:

If the interest rate is above the equilibrium value, the:

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2/3(Y - T). Planned investment is 300, as are government spending and taxes. a. If Y is 1,500, what is planned spending? What is inventory accumulation or decumulation? Should equilibrium Y be higher or lower than 1,500? b. What is equilibrium Y? (Hint: Substitute the values of equations for planned consumption, investment, and government spending into the equation Y = C + I + G and then solve for Y.) c. What are equilibrium consumption, private saving, public saving, and national saving? d. How much does equilibrium income decrease when G is reduced to 200? What is the multiplier for government spending?

The LM curve, in the usual case:

Along an IS curve all of the following are always true except:

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets? b. What two variables adjust to bring equilibrium in the markets?

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800. a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.) b. What is the slope of the LM curve? c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve? d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right? e. If M increases and P is constant, does the LM curve shift upward and to the left or downward and to the right? f. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?

For any given interest rate and price level, an increase in the money supply: