Question

1) Equilibrium output will rise and the equilibrium interest rate will fall if : A) government...

1) Equilibrium output will rise and the equilibrium interest rate will fall if :

A) government spending increases B) net exports increase. C) there is an autonomous increase in money demand D) the Fed increases the money supply

2) In the IS/LM model

A) the money supply is always fixed B) consumptions expenditures are fixed C) the price level is fixed D) the level of real GDP is fixed

3)Changes in monetary policy shift the LM curve, while changes in fiscal policy shift the IS curve

True or False

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Homework Answers

Answer #1

1) D) the Fed increases the money supply
(As money supply is increased, LM curve shifts downward to the right which decreases the equilibrium interest rate and increases the equilibrium output with given IS curve.)

2) C) the price level is fixed
(Real money supply is taken in IS/LM model. Real money supply = money supply/Price level. Price level is taken to be exogenous so that any shift in LM curve is due to changes in the money supply.)

3) True
(Changes in fiscal policy means changes in government spending and taxes which shift the IS curve as it represents the equilibrium in good market. Change in monetary policy means change in money supply which shifts LM curve as LM curve represents equilibrium in money market.)

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