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Money, Banking, and Financial Markets Practice Test: The IS-LM Model
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The IS-LM model is a two-dimensional macroeconomic model that shows the relationship between output and interest rates in a closed economy over the short term. It's also known as the Hicks–Hansen model. The IS-LM model is a graph that shows the intersection of the IS and LM curves, which represent the short-term equilibrium between interest rates and output. The IS curve represents the combination of nominal income and nominal interest rates where investment and savings are equal. The LM curve represents the combinations of income and interest rates.  The IS-LM model is based on Keynesian... Show more
Money, Banking, and Financial Markets Practice Test: The IS-LM Model
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25 Questions

1. Keynes was especially concerned with explaining the ________ level of output and employment during the ________.
2. The negative relation between investment spending and the interest rate is what gives the________ curve its ________ slope.
3. Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.
4. Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium aggregate output will change by
5. Keynes reasoned that consumer expenditure is most closely related to
6. In the Keynesian model of income determination, consumer expenditure includes spending by
7. In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production.
8. If the income multiplier is 4, the value of the marginal propensity to consume is
9. When interest rates fall in the United States (with the price level fixed), the value of the dollar________, domestic goods become ________ expensive, and net exports ________.
10. Equilibrium output is reduced by an increase in
11. In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.
12. Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________.
13. In the Keynesian cross diagram, the point at which the aggregate demand function crosses the 45 degree line indicates the
14. Aggregate output is increased by a decrease in
15. Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is
16. A difference between inventory investment and fixed investment is that
17. Because inflation was not a serious problem during the Great Depression, Keynesʹs analysis assumed
18. Which of the following statements concerning Keynesian analysis is false?
19. Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism - factors he referred to as ʺanimal spirits.ʺ
20. When the interest rate rises, ________.
21. In the simple Keynesian model, equilibrium aggregate output is determined by
22. Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending.
23. The ________ describes points for which the goods market is in equilibrium.
24. Aggregate demand in an economy with no government or foreign trade is
25. If actual output is greater than equilibrium output, firms will ________ output to keep from________ inventories.

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