IS-LM Model Questions and Answers, Exercises of Economics

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Questions on IS-LM Model

B.S.Misra

A change in which of the following will NOT shift the IS-curve? 0 I do not want to answer this Question 1 Autonomous investment 2 Autonomous money demand 3 Autonomous consumption 4 Autonomous net exports 5 Autonomous saving

In an IS-LM model, any point that is to the left and below the IS-curve indicates a situation where

• 0 I do not want to answer this Question
• 1 There is excess demand for goods and services in the expenditure sector
• 2 There is excess supply of goods and services in the expenditure sector
• 3 The expenditure sector is in equilibrium but the money sector is not
• 4 There is excess demand for money in the money sector
• 5 There is excess supply of money in the money sector

If the quantity of money demanded exceeds the quantity supplied at the current interest rate, then

• 0 I do not want to answer this Question
• 1 Bond prices and the interest rate will both rise
• 2 Bond prices and the interest rate will both fall
• 3 Bond prices will rise and the interest rate will fall
• 4 Bond prices will fall and the interest rate will rise
• 5 The value of both stocks and bonds will increase

When the LM-curve is vertical,

• 0 I do not want to answer this Question
• 1 The monetary policy multiplier is zero
• 2 Monetary policy is at its weakest but fiscal policy has a maximum effect on income
• 3 Monetary policy has a maximum effect, but fiscal policy has no effect on income
• 4 Monetary policy has a maximum effect, but fiscal policy has no effect on income
• 5 Monetary policy has a maximum effect, but fiscal policy has no effect on income

The transmission mechanism between an open market purchase by the central bank and an increase in aggregate demand can break down if

• 0 I do not want to answer this Question
• 1 Banks are unwilling to lend to private firms
• 2 Money demand is totally interest inelastic
• 3 Investment is very interest sensitive
• 4 Bond prices increase too much
• 5 None of the above

Fiscal policy becomes more powerful in changing the level of output as

• 0 I do not want to answer this Question
• 1 Investment becomes more interest elastic
• 2 Money demand becomes more interest inelastic
• 3 Money demand becomes more income elastic
• 4 The marginal propensity to save gets smaller
• 5 The marginal propensity to consume gets smaller

Crowding out occurs when

• 0 I do not want to answer this Question
• 1 An increase in defense spending causes a decrease in consumption
• 2 Expansionary monetary policy fails to stimulate economic growth
• 3 Expansionary fiscal policy causes interest rates to rise, thereby reducing private spending
• 4 Tax increases result in a drop in consumption
• 5 A policy designed to increase the budget surplus causes the economy to enter a recession