Question

The IS curve represents

		a.    All the combinations of interest and income which cause the money market to be in equilibrium
		b.    All the combinations of interest and income which cause the goods market to be in equilibrium
		c.    All the combinations of inflation and unemployment which cause the goods market to be in equilibrium
		d.    All the combinations of inflation and unemployment which cause the money market to be in equilibrium

A short-run aggregate supply curve shows fixed ___________, and a long-run aggregate supply curve shows fixed _____________.

	a.	prices;output
	b.	output;prices
	c.	prices;prices
	d.	output;output

Okun's law refers to

	a.	The slope of the aggregate demand curve
	b.	the relationship between consumption and investment
	c.	the long-run neutrality of money
	d.	the negative relationship between GDP and unemployment

According to Austrian theory, an artificially low interest rate will lead to

	a.	Over-investment
	b.	Malinvestment
	c.	Overconsumption
	d.	All of the above

Answer 1

b. All the combinations of interest and income which cause the goods market to be in equilibrium

IS CURVE: Y = C+ I + G + NX

It shows interest and output from goods market while LM curve shows same relationship in money market.

a. prices: output

In short run, the supply curve is horizontal keeping the prices constant at all level of output. In long run, the supply curve is vertical keeping the output constant at all level of prices.

d. the negative relationship between GDP and unemployment

Okun's law show the relationship between the unemployment and loss in GDP. It is negatively sloped as unemployment and GDP are inversely related.

c. Over- consumption

Since, the interest rate is almost zero, nobody will want to invest the funds which would lead to higher than normal consumption.