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Money, Banking, and Financial Markets Practice Test: Monetary and Fiscal Policy in the IS-LM Model
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The IS-LM model, or Hicks-Hansen model, is a two-dimensional model that shows the relationship between interest rates, output, and the money market in a closed economy. The IS curve represents the equilibrium in the goods market, and the LM curve represents the equilibrium in the money market. For example, an expansionary monetary policy can shift the LM curve to the right, resulting in lower interest rates and higher output.  The IS-LM model can be used to analyze the effects of monetary and fiscal policy. For example, fiscal policy causes changes in the IS curve, which results in changes... Show more
Money, Banking, and Financial Markets Practice Test: Monetary and Fiscal Policy in the IS-LM Model
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25 Questions

1. A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________.
2. In the long-run ISLM model and with everything else held constant, the long-run effect of a tax cut is to ________ real output and ________ the interest rate.
3. In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.
4. An increase in government spending causes the equilibrium level of aggregate output to________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.
5. If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________.
6. In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.
7. The LM curve will be vertical and fiscal policy ineffective when ________.
8. An increase in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant.
9. Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.
10. In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the________, everything else held constant.
11. In the long-run the ISLM model predicts that ________ can change real output.
12. If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the right, everything else held constant.
13. In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the________, everything else held constant.
14. A shift in tastes toward American goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant.
15. A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.
16. If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant.
17. If American college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.
18. Crowding out will be more pronounced the closer to vertical is the ________.
19. When the central bank ________ the money supply, the LM curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant.
20. The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as ________.
21. In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift________ and the equilibrium level of aggregate output to ________, everything else held constant.
22. A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant.
23. A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.
24. In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.
25. In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to________, and the IS curve to shift to the ________, everything else held constant.

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