Economics of Money, Banking, and Financial Markets, 12e (Mishkin)
Chapter 27 Web Chapter 2: The ISLM Model
27.1 Keynes’s Fixed Price Level Assumption and the IS Curve
1) Because inflation was not a serious problem during the Great Depression, Keynes’s analysis
assumed
A) that unemployment also was not a problem.
B) that the money supply was fixed.
C) that the price level was fixed.
D) that monetary policy is not effective.
2) The money market is in equilibrium
A) at any point on the IS curve.
B) at any point on the LM curve.
C) at only one point on the LM curve.
D) only at the intersection of the IS and LM curves.
3) The ________ describes the combinations of interest rates and aggregate output for which the
quantity of money demanded equals the quantity of money supplied.
A) IS curve
B) LM curve
C) consumption function
D) investment schedule
4) In the Keynesian model the quantity of money demanded is ________ related to income and
________ related to the interest rate.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively
5) According to the liquidity preference theory, the demand for money is ________ related to
aggregate output and ________ related to interest rates.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
6) As interest rates rise, the opportunity cost of holding money ________ and the demand for
money ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
7) As aggregate output rises, the demand for money ________ and the interest rate ________, so
that money demanded equals money supplied and the money market is in equilibrium.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
8) Everything else held constant, if aggregate output is to the right of the LM curve, then there is
an excess ________ of money which will cause the interest rate to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
9) Everything else held constant, if aggregate output is to the left of the LM curve, then there is
an excess ________ of money which will cause the interest rate to ________.
A) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise
10) Everything else held constant, if aggregate output is to the ________ of the LM curve, then
there is an excess supply of money which will cause the interest rate to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
11) Everything else held constant, if aggregate output is to the ________ of the LM curve, then
there is an excess demand of money which will cause the interest rate to ________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
12) Everything else held constant, if aggregate output is to the ________ of the LM curve, then
there is an excess ________ of money which will cause the interest rate to fall.
A) right; supply
B) right; demand
C) left; supply
D) left; demand
13) Everything else held constant, if aggregate output is to the ________ of the LM curve, then
there is an excess ________ of money which will cause the interest rate to rise.
A) right; supply
B) right; demand
C) left; supply
D) left; demand
27.2 ISLM Approach to Aggregate Output and Interest Rates
1) Macroeconomic equilibrium requires
A) equilibrium in the goods market.
B) equilibrium in the money market.
C) equilibrium in both the goods and money markets.
D) equilibrium in neither the goods nor the money market.
2) When the IS and LM curves are combined in the same diagram, the intersection of the two
curves determines the equilibrium level of ________ as well as the ________.
A) aggregate output; price level
B) aggregate output; interest rate
C) money supply; price level
D) consumer expenditures; interest rate
3) If the economy is on the LM curve, but is to the right of the IS curve, aggregate output will
________ and the interest rate will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
4) If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will
________ and the interest rate will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
5) If the economy is on the IS curve, but is to the left of the LM curve, aggregate output will
________ and the interest rate will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
6) If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will
________ and the interest rate will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
7) If the economy is on the IS curve, but is to the left of the LM curve, then the ________ market
is in equilibrium, but the interest rate is ________ the equilibrium level.
A) goods; below
B) goods; above
C) money; below
D) money; above
8) If the economy is on the LM curve, but is to the right of the IS curve, then the ________
market is in equilibrium, but aggregate ________ exceeds aggregate ________.
A) goods; output; demand
B) goods; demand; output
C) money; output; demand
D) money; demand; output
1) An increase in the money supply, other things equal, shifts the ________ curve to the
________.
A) IS; right
B) IS; left
C) LM; left
D) LM; right
2) If the Federal Reserve conducts open market purchases, the money supply ________, shifting
the LM curve to the ________, everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
3) If the Federal Reserve conducts open market sales, the money supply ________, shifting the
LM curve to the ________, everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
4) If the Federal Reserve conducts open market ________, the money supply ________, shifting
the LM curve to the right, everything else held constant.
A) purchases; decreases
B) sales; decreases
C) purchases; increases
D) sales; increases
5) If the Federal Reserve conducts open market ________, the money supply ________, shifting
the LM curve to the left, everything else held constant.
A) purchases; decreases
B) sales; decreases
C) purchases; increases
D) sales; increases
6) An increase in the quantity of money supplied shifts the money supply curve to the ________,
and the equilibrium interest rate ________, everything else held constant.
A) right; falls
B) right; rises
C) left; falls
D) left; rises
7) A decrease in the quantity of money supplied shifts the money supply curve to the ________,
and the equilibrium interest rate ________, everything else held constant.
A) right; falls
B) right; rises
C) left; falls
D) left; rises
8) An increase in the quantity of money supplied shifts the money supply curve to the ________
and the LM curve to the ________, everything else held constant.
A) right; left
B) right; right
C) left; left
D) left; right
9) A decrease in the quantity of money supplied shifts the money supply curve to the ________,
and the LM curve to the ________, everything else held constant.
A) right; left
B) right; right
C) left; left
D) left; right
10) A decline in the money ________ shifts the LM curve to the ________, causing the interest
rate to rise and output to fall, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
11) A decline in the money supply shifts the LM curve to the left, causing the interest rate to
________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
12) An increase in the money ________ shifts the LM curve to the ________, causing the
interest rate to fall and output to rise, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
13) An increase in the money supply shifts the LM curve to the right, causing the interest rate to
________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
14) When the central bank ________ the money supply, the LM curve shifts to the right, interest
rates ________, and equilibrium aggregate output ________, everything else held constant.
A) increases; fall; increases
B) increases; rise; decreases
C) decreases; rise; decreases
D) decreases; fall; increases
15) An autonomous decrease in money demand, other things equal, shifts the ________ curve to
the ________.
A) IS; right
B) IS; left
C) LM; left
D) LM; right
16) An autonomous increase in money demand, other things equal, shifts the ________ curve to
the ________.
A) IS; right
B) IS; left
C) LM; left
D) LM; right
17) As bonds become a riskier asset, the demand for money ________ and, all else constant, the
equilibrium interest rate ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
18) An autonomous rise in ________ shifts the LM curve to the ________, everything else held
constant.
A) net exports; right
B) net exports; left
C) money demand; right
D) money demand; left
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27.4 Changes in Equilibrium Level of the Interest Rate and Aggregate Output
1) In the ISLM framework, an expansionary monetary policy causes aggregate output to
________ and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
2) An expansionary monetary policy shifts the LM curve to the ________, reducing ________,
everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
3) Everything else held constant, a monetary expansion is characterized by ________ output and
________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
4) A contractionary monetary policy shifts the LM curve to the ________, reducing ________,
everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
5) Everything else held constant, a monetary contraction is characterized by ________ output
and ________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
6) In the money market, a condition of excess demand for money can be eliminated by a
________ in aggregate output or a ________ in the interest rate, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
7) In the money market, a condition of excess supply of money can be eliminated by a ________
in aggregate output or a ________ in the interest rate, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
8) In the ISLM framework, an expansionary fiscal policy causes aggregate output to ________
and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
9) In the ISLM framework a contractionary fiscal policy causes aggregate output to ________
and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
10) 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.
A) monetary; monetary
B) monetary; fiscal
C) fiscal; monetary
D) fiscal; fiscal
11) Aggregate output and the interest rate are ________ related to government spending and are
________ related to taxes.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
12) An increase in spending that results from expansionary ________ policy causes the interest
rate to ________, everything else held constant.
A) fiscal; rise
B) fiscal; fall
C) incomes; rise
D) incomes; fall
13) 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
A) consumer confidence decreases sharply.
B) there is an investment boom.
C) the money supply increases.
D) taxes are cut.
14) If an economy experiences high interest rates and high unemployment, the ISLM framework
predicts that ________ policy has been too ________.
A) fiscal; expansionary
B) fiscal; contractionary
C) monetary; expansionary
D) monetary; contractionary
15) Which of the following statements concerning Keynesian ISLM analysis is TRUE?
A) For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.
B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve.
C) A fall in the money supply shifts the LM curve to the right.
D) Expansionary fiscal policy will cause the interest rate to fall.
16) Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government
stimulus was overwhelmed by the continuing deterioration in credit market conditions.
Everything else held constant and using the ISLM model, the net effect would cause the
________ curve to ________ and output will ________.
A) IS; shift left; decrease
B) IS; shift right; increase
C) LM; shift right; increase
D) LM; shift left; decrease