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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. In the long-run ISLM model and with everything else held constant, the long-run effect of a cut in government spending is to ________ real output and ________ the interest rate.
2. Aggregate output and the interest rate are ________ related to government spending and are________ related to taxes.
3. In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.
4. The rate of output at which the price level has no tendency to rise or fall is called the ________.
5. An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.
6. A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant.
7. 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.
8. 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.
9. If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant.
10. The less interest-sensitive is money demand, the ________.
11. A decline in the money ________ shifts the LM curve to the ________, causing the interest rate to rise and output to fall, everything else held constant.
12. If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred.
13. An autonomous decrease in money demand, other things equal, shifts the ________ curve to the________.
14. If the price level increases, everything else held constant, the ________ curve shifts to the________.
15. If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant.
16. In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called ________.
17. Everything else held constant, an increase in government spending will cause ________.
18. A decline in taxes ________ consumer expenditure and shifts the ________ curve to the________, everything else held constant.
19. An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant.
20. An autonomous increase in money demand, other things equal, shifts the ________ curve to the________.
21. In the ISLM framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.
22. An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant.
23. In the long-run the ISLM model predicts that ________ can change real output.
24. If the Fed adopts a policy of pegging the interest rate, a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________.
25. Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico.

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