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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 rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.
2. A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.
3. 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________ and the equilibrium level of aggregate output to ________, everything else held constant.
4. The relationship between the price level and the quantity of aggregate output for which the goods and money markets are in equilibrium is called the ________.
5. An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant.
6. Everything else held constant, a monetary expansion is characterized by ________ output and________ interest rates.
7. An increase in the money ________ shifts the LM curve to the ________, causing the interest rate to fall and output to rise, everything else held constant.
8. A tax increase ________ disposable income, ________ consumption expenditure, and shifts theIS curve to the ________, everything else held constant.
9. A decrease 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.
10. In the long-run ISLM model and with everything else held constant, the long-run effect of a contractionary fiscal policy is to ________ real output and ________ the interest rate.
11. An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant.
12. Other things equal, a decrease in autonomous consumption shifts the ________ curve to the________.
13. In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level.
14. 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 up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the________, everything else held constant.
15. The IS curve shifts to the left when ________.
16. An increase in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant.
17. A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant.
18. 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.
19. 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 ________.
20. In the long-run ISLM model and with everything else held constant, the long-run effect of a fall in net exports is to ________ real output and ________ the interest rate.
21. Aggregate output and the interest rate are ________ related to government spending and are________ related to taxes.
22. In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate.
23. Which of the following statements concerning Keynesian ISLM analysis is true?
24. 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.
25. A decline in the money supply shifts the LM curve to the left, causing the interest rate to________ and output to ________, everything else held constant.

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