Professional Documents
Culture Documents
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True or False Questions
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True or False Questions
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True or False Questions
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True or False Questions
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True or False Questions
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True or False Questions
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Multiple-Choice Questions
(2005 Exam Question)
(1) If real income rose and the interest rate fell
following an increase in government purchases,
the:
b. IS curve must be vertical.
c. LM curve must be vertical.
d. central bank must have increased the money
supply at the same time.
e. central bank must have decreased the money
supply at the same time.
Answer: c.
Hint: (See next slide) 8
Multiple-Choice Questions
LM1
r
(1) LM2
(2)
r2
r1 IS2
IS1
Y1 Y2 Y3 Y
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Multiple-Choice Questions
(2005 Exam Question)
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Multiple-Choice Questions
(2005 Exam Question)
(8) If income is initially less than the natural rate of
output, the price level:
b. will gradually fall, shifting the LM curve
downward.
c. will gradually rise, shifting the LM curve
upward.
d. will fall, shifting the IS curve to the right.
e. is stuck at this level even in the long run.
Answer: a.
Hint: (See P294)
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Multiple-Choice Questions
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Multiple-Choice Questions
(13) The following statement is FALSE:
b. money demand depends on the nominal interest rate.
c. investment demand depends on the real interest rate.
d. IS-LM analysis is unable to incorporate changes in
expected inflation.
e. an expected deflation causes the real interest rate to rise
at each level of the nominal interest rate, which leads to
a contractionary (leftward) shift of the IS curve.
Answer: c.
Hint: (See P300).
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Multiple-Choice Questions
(14) If an economy is in a liquidity trap, then:
b. the interest rate is so low that fiscal policy
cannot stimulate the economy.
c. the interest rate is so low that monetary policy
cannot stimulate the economy.
d. the budget deficit is so high that fiscal policy
cannot stimulate the economy.
e. all of the above.
Answer: b.
Hint: (See P303).
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Multiple-Choice Questions
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Multiple-Choice Questions
(17) If money demand is not very sensitive to the
level of income:
b. the money demand curve does not shift very far
to the right as income rises.
c. only a small change in interest rate is necessary
to offset the increase in money demand caused
by a change in income.
d. the LM curve is relatively flat.
e. all of the above.
Answer: d.
Hint: (See P309). 25
Multiple-Choice Questions
(2005 Exam Question)
(18) If the quantity of money demanded is very
sensitive to the interest rate:
b. the money demand curve will be relatively flat.
c. a shift in money demand due to a change in
income leads to a small change in the
equilibrium interest rate.
d. the LM curve is relatively flat.
e. all of the above.
Answer: d.
Hint: (See P309).
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Numerical Questions
(continued)
Answer: Y = C + I
Y = 60 + 0.8Y + 116 – 2r
0.2Y = 176 – 2r
r = -0.1Y + 88
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Numerical Questions
r = 0.04Y – 24 (2)
Answer: (1) – (2) then
0 = -0.14Y + 112
therefore, Y = 800. Back to (1) or (2) and obtain
r = 8%.
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Numerical Questions
(continued)
Answer:
Recall r = i – π , solving two equations by
e
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Numerical Questions
(continued)
Reconstruct three equations and then
i + 7.5 = 40 – 0.025Y (4)
i = -50 + 0.05Y (5)
(4) – (5) and obtain
7.5 = 90 – 0.075Y. Thus Y = 1100.
Bring Y back to (1), i = 5%.
Then r = i + 7.5 = 12.5%
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