Macro Chap 7

By referring to the Figure, an increase in the money stock

• shifts the LM schedule to the right from LM₀ to LM₁

• shifts the LM schedule to the left from LM₀ to LM₂.

• leaves the LM curve unchanged at LM₀.

• shifts neither the IS nor the LM schedule.

Changes in all of the following shift the LM curve except

• the price level.

• income

• the money supply

• money demand

Monetary policy will be

• less effective the higher the interest elasticity of investment, and thus the steeper the IS schedule.

• more effective the higher the interest elasticity of investment, and thus the flatter the IS schedule

• equally effective regardless of whether or not the interest elasticity of investment is higher or lower, or the IS curve is flatter or steeper.

• more effective with a vertical IS curve.

When the IS curve is flatter, monetary policy becomes

• less effective due to the lower interest elasticity of investment.

• more effective due to the higher interest elasticity of investment.

• equally effective regardless of the interest elasticity of investment.

• more effective with a horizontal IS curve.

Within the IS-LM curve model, a decline in expectations would

• lower income and the interest rate

• increase income and lower the interest rate

• lower income, but leave the interest rate unchanged

• lower the interest rate, but leave income unchanged.

• lower income and increase the interest rate.

When the IS curve is steeper, what happens to the effectiveness of monetary policy?

• It becomes less effective due to the higher interest elasticity of investment.

• It becomes more effective due to the lower interest elasticity of investment.

• It becomes equally effective regardless of the interest elasticity of investment.

• It becomes more effective with a vertical IS curve.

A lower interest elasticity of investment demand leads to a

• steeper IS curve

• flatter IS curve

• steeper LM curve.

• flatter LM curve.

According to the IS-LM model, an increase in government spending would

• shift the IS curve to the right, increasing income and the interest rate

• shift the IS curve to the left, decreasing income and the interest rate

• shift the LM curve to the right, increasing income and decreasing the interest rate

• shift the LM curve to the left, decreasing income and increasing the interest rate

When the LM curve is steeper, what happens to the effectiveness of fiscal policy?

• It becomes less effective due to the higher interest elasticity of money demand

• It becomes more effective due to the lower interest elasticity of money demand

• It becomes equally effective regardless of the interest elasticity of money demand

• It becomes more effective with a vertical LM curve

Traditional Keynesians tend to favor

• monetary policy over fiscal policy because of the effectiveness of central banks.

• monetary policy over fiscal policy because it reduces interest rates

• fiscal policy over monetary policy because it doesn’t impact interest rates

• fiscal policy over monetary policy because of the liquidity trap.