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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. Which of the following does not shift the IS curve?
2. Everything else held constant, a shift in tastes in the U.S. towards American goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ inMexico.
3. Everything else held constant, a decrease in the price level will ________.
4. If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to________, everything else held constant.
5. Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
6. As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________.
7. An autonomous decrease in money demand, other things equal, shifts the ________ curve to the________.
8. Everything else held constant, a purchase of government securities by the Fed will cause________.
9. If the price level increases, everything else held constant, the ________ curve shifts to the________.
10. Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the________ and aggregate demand will ________.
11. Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if________.
12. The more interest-sensitive is money demand, the ________.
13. 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.
14. If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred.
15. In the Keynesian cross diagram, an increase in autonomous consumer expenditure 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.
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. If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output.
18. If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant.
19. A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.
20. 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.
21. Everything else held constant, expansionary monetary policies will cause ________.
22. 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.
23. 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.
24. 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.
25. 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.

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