This pack of ECO 316 Week 4 Chapter 24 Linking the Financial System and the Economy The IS-LM-FE Model contains:

24.1 Multiple Choice Questions

1) Why did the Fed cut interest rates in late 1991?

2) Why did the Fed cut interest rates in late 1998?

3) A general equilibrium is an outcome in which

4) The money market includes trade in

5) Purchases and sales of stocks, bonds, and houses take place

6) In macroeconomic models, Y typically represents

7) In macroeconomic models, Y stands for

8) An increase in the expected profitability of investment will cause

9) A closed economy is one in which

10) In a closed economy, the total quantity of goods demanded equals the sum of

11) In a closed economy, the goods market is in equilibrium when

12) In a closed economy, if the goods market is in equilibrium, national saving is $2 trillion, national consumption is $7 trillion, and government purchases are $2.5 trillion, then GDP equals

13) In a closed economy, national saving equals

14) For the goods market to be in equilibrium in a closed economy, which of the following must be true?

15) Which of the following is NOT a key factor in determining household saving?

16) An increase in the expected real interest rate will have a

17) An increase in government purchases reduces national saving as long as

18) Evidence suggests that when government purchases rise

19) An increase in the real interest rate will

20) In the saving-investment diagram, an increase in output will lead to

21) In the savings-investment diagram, we know that an increase in the real interest rate raises the level of saving because

22) The IS curve depicts the relationship between

23) In a move down the IS curve,

24) In a move up the IS curve,

25) At points not on the IS curve,

26) At a point above the IS curve,

27) At a point below the IS curve,

28) At a point below the IS curve,

29) In an open economy,

30) In a large open economy,

31) In comparison with a closed economy, in a large open economy

32) In a large open economy, the real interest rate does not have to fall by as much in order to restore equilibrium in the goods market in response to an increase in domestic output because

33) Studies have shown that the degree of international mobility of savings among the United States, Japan, and many European countries

34) The IS curve for a small open economy is

35) With respect to the IS curve for a small open economy

36) Which of the following would NOT cause a shift in the IS curve?

37) Which of the following would NOT cause the IS curve to shift to the left?

38) The level of full employment output

39) During the first Gulf War

40) The intersection of the IS curve and the FE line

41) The FE line would be shifted to the right by

42) Full-employment output can increase for all of the following reasons EXCEPT

43) An unexpected decrease in oil prices would

44) Which of the following equations correctly describes equilibrium in the two asset markets?

45) If the demand for nonmoney assets exceeds the supply of nonmoney assets, the demand for money

46) If the money market is in equilibrium

47) A change in the inflation rate will

48) Which of the following is the correct expression for the nominal market interest rate?

49) A decline in real output causes the demand for real balances

50) An increase in real output causes the demand for real balances

51) The LM curve is the combinations of

52) The LM curve slopes upward to the right because

53) The slope of the LM curve is determined by

54) If the demand for money is highly sensitive to the interest rate,

55) When the interest sensitivity of the demand for real money balances is low,

56) If the demand for real money balances were completely insensitive to the opportunity cost of holding money,

57) If the demand for real money balances were infinitely sensitive to the interest rate,

58) At any point along the LM curve,

59) At a point above the LM curve,

60) At a point below the LM curve,

61) At a point above the LM curve,

62) Which of the following will NOT cause the LM curve to shift?

63) An increase in the supply of real money balances will cause

64) In the short run, an increase in the money supply will lead to

65) In general equilibrium, an increase in the money supply leads to

66) Which is true concerning the effect of an increase in the money supply compared to general equilibrium?

67) Following a decline in the quantity of real money balances supplied, equilibrium is restored in the money market by

68) An increase in the price level

69) A drop in the interest paid on checkable deposits will

70) An increase in the nominal return on money

71) An increase in expected inflation will

72) Which of the following will NOT cause the LM curve to shift to the left?

73) If GDP exceeds its full-employment level in the short run, what will take place to restore general equilibrium?

74) When the economy is out of general equilibrium, which curve will adjust to restore general equilibrium?

75) Which of the following does NOT necessarily hold when the economy is in long-run equilibrium?

76) A cut in the federal income tax will cause the IS curve to

77) If government purchases decrease, the IS curve will

78) An increase in labor productivity will cause the FE line to

79) If the economy is in general equilibrium and the Fed reduces the money supply

80) Economists generally believe that prices are

81) In the long run, a permanent increase in government spending will

82) A decline in expected inflation will likely lead to

83) In a large open economy, an increase in government spending will lead in the long run to

84) In the long run, a rightward shift of the FE line will result in

85) In a large open economy, an increase in productivity will lead in the long run to

86) In the long run, a permanent increase in the nominal money supply will

87) The neutrality of money refers to

88) Many economists believe that changes in the money supply

89) When seeking to explain the low interest rates in 2005, the article “Excess Savings or Excess Liquidity?” makes the case that

24.2 Essay Questions

1) Suppose that George is dissatisfied with the proportion of his wealth that is held in money. Is he likely to be satisfied with his nonmoney asset holdings of savings in bonds and stocks?

2) Suppose that computer hackers are able to steal the credit card numbers of a large number of people from the Internet. How is the LM curve likely to respond if the money supply doesn’t change?

3) Analyze the effect of the rise of retailing on the Internet in terms of the long-run equilibrium in the IS-LM-FE model.

4) Suppose that the Fed is concerned that a decline in investment spending by businesses is likely to take place. In order to offset the effects of the decline in investment spending, the Fed increases the nominal money supply. If the decline in investment spending does not take place, what will be the impact of the Fed’s action on the economy in the short run? What will be the impact of the Fed’s action in the long run?