Question

20) Which of the following best defines the LM curve? A) the combinations of i and...

20) Which of the following best defines the LM curve?
A) the combinations of i and Y that maintain equilibrium in the goods market
B) illustrates the effects of changes in i on investment
C) illustrates the effects of changes in i on desired money holdings by individuals
D) the combinations of i and Y that maintain equilibrium in financial markets
21) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a reduction in the money supply will cause
A) an immediate drop in Y and immediate increase in i.
B) an immediate increase in i and no initial change in Y.
C) a gradual increase in i and gradual reduction in Y.
D) none of the above
22) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a reduction in government spending will cause
A) an immediate drop in Y and immediate increase in i.
B) an immediate reduction in i and no initial change in Y.
C) a gradual reduction in i and gradual reduction in Y.
D) a gradual reduction in i and an immediate reduction in Y.
23) Based on our understanding of the IS-LM model that takes into account dynamics, we know that an increase in government spending will cause
A) a gradual increase in i and gradual increase in Y.
B) an immediate increase in Y and immediate drop in i.
C) an immediate increase in i and no initial change in Y.
D) a gradual increase in i and an immediate increase in Y.
24) An increase in government spending will likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
25) If government spending and taxes increase by the same amount,
A) the IS curve does not shift
B) the IS curve shift leftward
C) the IS curve shifts rightward
D) the LM curve shifts downward
26) The IS curve will shift to the left when which of the following occurs?
A) a reduction in the money supply
B) a reduction in government spending
C) an increase in the interest rate
D) all of the above
E) none of the above
27) Which of the following occurs as the economy moves rightward along a given IS curve?
A) A reduction in the interest rate causes investment spending to decrease.
B) A reduction in the interest rate causes money demand to increase.
C) A reduction in the interest rate causes a reduction in the money supply.
D) An increase in government spending causes a reduction in demand for goods.
E) A reduction in taxes causes a reduction in demand for goods.

Homework Answers

Answer #1

20 d) as the definition says , lm curve shows the eqm in asset(financial) market.

21 a)

As money supply falls , it creates excess demand for money and upward pressure on interest rate ( due to increase in demand for bonds) and fall in qty of output.

22.c)

As govt reduces its expenditure , interest rate falls and output also falls.

23.a) a gradual increase in and . a gradual increase in Y.

24) An increase in government spending will likely have which of the following effects

A) a rightward shift in the IS curve

as Is G is a component of IS CURVE

25

If government spending and taxes increase by the same amount,

A) the IS curve does not shift - as multiplier is 1

26) The IS curve will shift to the left when which of the following occurs

B) a reduction in government spending

since govt spending is the only component of Is given in the options.

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