In the beginning of 2012 most EU countries signed a fiscal compact. In practice for most of them this meant that they had to embark on a policy of fiscal consolidation (meaning a decrease in budget deficits). It can happen through a decrease in government expenditure, increase in tax revenues, or a combination of the two. Let us assume that this was going on during 2015. Let us also assume that the private financial and non-financial sector in Europe really trusts the EU governments that they will indeed consolidate – in practice this means the private banks and businesses have a greater level of trust in the business environment, while the non-bank public has greater trust in the banking sector. Also in 2015 the European Central Bank announced a program for supplying a lot of liquidity to the banks in the Eurozone. Based on this information, use the ISLM model (note, the question is NOT about the real world, but about what would the ISLM model have to say) to answer the following questions:

Fiscal consolidation, in the manner described above, would mean

a. increase in aggregate demand

b. decrease in aggregate demand

c. no change in aggregate demand

d. the information given is insufficient to evaluate the change in aggregate demand

Fiscal consolidation, in the manner described above, would mean that

a. the IS curve shifts right and up

b. the LM curve shifts right and down

c. the IS curve shifts left and down

d. the LM curve shifts left and up

The increased trust of banks in the business environment will lead to ___________ in excess reserve ratio, the increased trust of the public in banks will lead to ___________ in cash-deposit ratio, and this will mean that the money multiplier will_________.

a. increase; decrease; decrease

b. decrease; increase; increase

c. increase; increase; decrease

d. decrease; decrease; increase

The supply of additional liquidity by the ECB will mean that

a. the monetary base will increase

b. the monetary base will decrease

c. the monetary base will not change

d. the information is insufficient to evaluate the change in monetary base

The combination of higher trust in the business environment and more liquidity from the ECB will result in

a. an increase in money supply

b. a decrease in money supply

c. no change in money supply

d. the information is insufficient to evaluate the change in money supply

The combination of higher trust in the business environment and more liquidity from the ECB will mean that

a. the IS curve shifts right and up

b. the LM curve shifts right and down

c. the IS curve shifts left and down

d. the LM curve shifts left and up

Ultimately the combination of the fiscal compact and the actions of the ECB will mean that according to the ISLM model in 2015 there will be

a. an increase in interest rates and an indeterminate change in real output

b. an increase in real output and an indeterminate change in interest rates

c. a decrease in interest rates and an indeterminate change in real output

d. a decrease in real output and an indeterminate change in interest rates