Unit 6 ECO

The LM curve is drawn for a given:

• nominal income.

  
  

• real income.

  
  

• money supply.

  
  

• interest rate.

  
  

If the central bank increased the money supply, then the LM curve would:

• become steeper.

  
  

• shift downward.

  
  

• shift upward.

  
  

• become flatter

The investment function and the IS curve slope:

• downward because higher interest rates induce less investment.

  
  

• upward because higher interest rates induce less investment.

  
  

• downward because higher interest rates induce more investment.

  
  

• upward because higher interest rates induce more investment.

  
  

The relationship between interest rates and the level of income that brings the goods and services market into equilibrium is called the:

• aggregate demand curve.

  
  

• IS curve.

  
  

• aggregate supply curve.

  
  

• LM curve.

  
  

According to the IS–LM model, an increase in government purchases causes a(n):

• decrease in income and an increase in the interest rate.

  
  

• increase in income and an increase in the interest rate.

  
  

• decrease in income and a decrease in the interest rate.

  
  

• increase in income and a decrease in the interest rate.

  
  

The relationship between the interest rate and the level of income that equilibrates the money market is called the:

• aggregate demand curve.

  
  

• IS curve.

  
  

• aggregate supply curve.

  
  

• LM curve.

  
  

If the marginal propensity to consume is large, then the:

• LM curve is relatively flat.

  
  

• IS curve is relatively flat.

  
  

• LM curve is relatively steep.

  
  

• IS curve is relatively steep.

  
  

Suppose that the LM curve is vertical. An increase in taxes will:

• decrease the interest rate and leave income unchanged.

  
  

• decrease income and leave the interest rate unchanged.

  
  

• increase the interest rate and leave income unchanged.

  
  

• increase income and leave the interest rate unchanged.

  
  

Suppose that the government raises taxes. According to the IS–LM model, what would the central bank have to do to keep income constant and what would be the subsequent effect on interest rates?

• The central bank needs to increase the money supply; interest rates go down.

  
  

• The central bank needs to increase the money supply; interest rates remain unchanged.

  
  

• The central bank needs to decrease the money supply; interest rates go up.

  
  

• The central bank needs to decrease the money supply; interest rates remain unchanged.

  
  

At the point where the IS curve and the LM curve intersect, the:

• the labor market is in equilibrium.

  
  

• the money and the goods market are in equilibrium.

  
  

• the goods market is in equilibrium.

  
  

• the money market is in equilibrium.