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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 ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.
2. Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall.
3. 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.
4. 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.
5. 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.
6. The more interest-sensitive is money demand, the ________.
7. 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.
8. 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.
9. Everything else held constant, expansionary monetary policies will cause ________.
10. Which of the following statements concerning Keynesian ISLM analysis is true?
11. If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant.
12. In deriving the aggregate demand curve a ________ in the price level leads to ________ in the real money supply because the nominal quantity of dollars can purchase ________ goods and services.
13. If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output.
14. 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.
15. The aggregate demand curve has the usual downward slope, since a higher price level reduces the real money supply, ________ interest rates, and ________ the equilibrium level of aggregate output, everything else held constant.
16. Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
17. 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.
18. Everything else held constant, a decrease in the price level will ________.
19. 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.
20. Everything else held constant, a monetary expansion is characterized by ________ output and________ interest rates.
21. 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.
22. Everything else held constant, an increase in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
23. Which of the following does not shift the IS curve?
24. Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________.
25. 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.

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