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Exam 10: Aggregate Demand I

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Question 1

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The Keynesian-cross analysis assumes planned investment:

A) is fixed and so does the IS analysis.
B) depends on the interest rate and so does the IS analysis.
C) is fixed,whereas the IS analysis assumes it depends on the interest rate.
D) depends on the interest rate unlike IS analysis which assumes planned investment is fixed.

E) A) and C)
F) B) and C)

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Question 2

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The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______,and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

A) saving and investment; planned spending
B) real-money balances; loanable funds
C) goods and services; real-money balances
D) real-money balances; goods and services

E) None of the above
F) B) and C)

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Question 3

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If the quantity theory of money is valid,then the LM curve:

Explain why an increase in the money supply,which is a change in the money market,will upset the equilibrium in the goods market.

All of the following items shrink the expenditure multiplier in the Keynesian-cross model except:

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

According to the theory of liquidity preference,if the supply of real money balances exceeds the demand for real money balances,individuals will:

An interpretation of why the IS curve slopes downward and to the right is that as income rises,national saving rises,and this increase drives the interest rate:

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of $\Delta$ T will:

If money demand does not depend on the interest rate,then the LM curve is ______ and ______ policy has no effect on output.

Equilibrium levels of income and interest rates are ______ related in the goods and services market,and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

a.Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income.Be sure to label: i.the axes ii.the curves iii.the initial equilibrium values iv.the direction the curve shifts v.the terminal equilibrium values.b.Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)

Suppose the government passes legislation that significantly reduces taxes.a.Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income.Be sure to label: i.the axes ii.the curves iii.the initial equilibrium values iv.the direction the curve shifts v.the terminal equilibrium values.b.Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

The Keynesian cross shows:

Use the following to answer questions : Exhibit: Market for Real Money Balances -(Exhibit: Market for Real Money Balances) Based on the graph,the equilibrium levels of interest rates and real money balances are:

An explanation for the slope of the LM curve is that as:

a.Graphically illustrate how an increase in income affects the equilibrium levels of saving,investment,and the interest rate in the loanable funds model.Be sure to label: i.the axes ii.the curves iii.the initial equilibrium values iv.the direction the curve shifts to v.the terminal equilibrium values.b.Explain in words what happens to the equilibrium levels of saving,investment,and the interest rates as a result of the increase in income.

According to the theory of liquidity preference,the supply of nominal money balances:

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.Assume that the marginal propensity to consume is unchanged,but the intercept of the consumption function is made smaller so that at every income level saving is greater.This will: