Multiple Choice

1. The IS curve represents equilibrium in the goods market:

A) When saving and investment are made a function of the rate of interest

B) When we introduce the impact of business decision-making on the determination of the level

Of income

C) For different combinations of income and interest rates

D) When we allow investors to choose between bonds and real investments

E) None of the above

2. We can expect the IS curve to become flatter as:

A) The supply of money decreases

B) The marginal propensity to consume decreases

C) The income tax rate decreases

D) Investment becomes less sensitive to interest rate changes

E) Money demand becomes more sensitive to interest rate changes

3. Which of the following will result in a parallel shift of the IS curve to the left?

A) An increase in lump sum taxes

B) An increase in government expenditures

C) A decrease in nominal money supply

D) An increase in autonomous saving

E) An increase in the income tax rate

4. The wealth budget constraint implies:

A) That when the money market is in equilibrium, aggregate demand must be equal to aggregate supply

B) Money demand equals money supply

C) An excess demand for money has to equal an excess supply for bonds

D) An excess supply of bonds will lead to falling nominal interest rates

E) All of the above

5. Which of the following will result in a shift of the LM curve to the right?

A) An increase in interest rates

B) An increase in autonomous saving

C) An increase in money supply

D) A decrease in money supply

E) A decrease in taxes

6. Which of the following is TRUE in an IS-LM model?

A) Interest rates and prices are fixed but income can vary

B) The interest rate is fixed but income and prices can vary

C) Prices and income are fixed but the interest rate can vary

D) Prices are fixed but income and the interest rate can vary

E) Income and interest rates are fixed but prices can vary

7. When running contractionary monetary policy:

A) The Central Bank sells bonds in the bond market and bond prices and interest rates both rise

B) The Central bank sells bonds in the bond market and this creates an excess supply of liquidity in the

Economy

C) The Central Bank sells bonds in the bond market and this increase the money supply and the price

Of bonds

D) The Central Bank sells bonds in the bond market and this reduces the money supply and lowers the

Price of bonds

E) None of the above

8. Monetary policy becomes less effective as:

A) The marginal propensity to save increases

B) The interest sensitivity of money demand decreases

C) The interest sensitivity of investment decreases

D) Either A) or B) occurs

E) Either A) or C) occurs

9. The monetary transmission mechanism is:

A) The means by which the goods and money markets interact

B) The process by which changes in monetary variables affect the level of economic activity

C) The interaction of monetary variables and real variables

D) The change in the money supply following a change in fiscal policy

E) The process by which a change in aggregate demand following fiscal intervention brings about a change in the money market

10. Crowding out occurs when:

A) An increase in defence spending causes a decrease in consumption

B) Expansionary monetary policy fails to stimulate economic growth

C) Expansionary fiscal policy causes interest rates to rise, thereby reducing private spending

D) Tax increases result in a drop in private spending

E) A policy designed to increase the budget surplus causes the economy to enter a recession

11. Explain how and why the multiplier and the interest sensitivity of aggregate demand affect the slope of IS curve.

12. Explain why the slope of the IS curve is a factor in determining the working of monetary policy.