Macroeconomics, 7e (Abel/Bernanke/Croushore)
Chapter 9 The IS-LM/AD-AS Model
9.1 The FE Line
1) The FE line shows the level of output at which the ________ market is in equilibrium.
A) Goods
B) Asset
C) Labor
D) Money
2) The FE line
A) is horizontal.
B) is vertical.
C) slopes downward.
D) slopes upward.
3) The FE line is vertical because the level of output at full employment doesn’t depend on the
A) real wage rate.
B) level of employment.
C) marginal product of labor.
D) real interest rate.
4) Which of the following would shift the FE line to the right?
A) An adverse supply shock
B) An increase in labor supply
C) A decrease in the capital stock
D) An increase in the future marginal productivity of capital
5) Which of the following would shift the FE line to the left?
A) A beneficial supply shock
B) An increase in labor supply
C) A decrease in the capital stock
D) A decrease in the future marginal productivity of capital
6) An increase in the money supply would cause the FE line to
A) shift to the right.
B) shift to the left.
C) remain unchanged.
D) remain unchanged if Ricardian equivalence holds; otherwise, shift to the right.
7) An increase in investment spending would cause the FE line to
A) shift to the right.
B) shift to the left.
C) remain unchanged.
D) remain unchanged if Ricardian equivalence holds; otherwise, shift to the right.
8) An adverse supply shock would cause the FE line to
A) shift to the right.
B) shift to the left.
C) remain unchanged.
D) remain unchanged if the shock is temporary; shift to the right if the shock is permanent.
9) Describe what happens to the FE line if government purchases increase.
9.2 The IS Curve
1) The IS curve shows the combinations of output and the real interest rate for which
A) the goods market is in equilibrium.
B) the labor market is in equilibrium.
C) the financial asset market is in equilibrium.
D) an increase in output will cause the market-clearing interest rate to be bid up.
2) The IS curve
A) is horizontal.
B) is vertical.
C) slopes downward.
D) slopes upward.
3) Any change that reduces desired saving relative to desired investment (for a given level of
output) causes the real interest rate to ________ and shifts the IS curve ________.
A) increase; down and to the left
B) increase; up and to the right
C) decrease; down and to the left
D) decrease; up and to the right
4) A decline in expected future output would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) shift up and to the right only if people face borrowing constraints.
5) A decrease in the effective tax rate on capital would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) remain unchanged if taxes are fully deductible from income; otherwise, shift up and to the
right.
6) An increase in labor supply would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) shift up and to the right only if people face borrowing constraints.
7) An increase in the money supply would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) shift up and to the right only if people face borrowing constraints.
8) A temporary decline in productivity would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) shift up and to the right only if people face borrowing constraints.
9) A decrease in wealth would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) shift up and to the right only if people face borrowing constraints.
10) An increase in the expected future marginal product of capital would cause the IS curve to
A) shift up and to the right.
B) shift down and to the left.
C) remain unchanged.
D) remain unchanged if firms face borrowing constraints; otherwise, shift down and to the left.
11) The IS curve would unambiguously shift up and to the right if there were
A) an increase in both government purchases and corporate taxes.
B) an increase in both government purchases and the expected future marginal product of capital.
C) an increase in the expected future marginal product of capital and a decrease in expected
future output.
D) a decrease in both corporate taxes and the expected future marginal product of capital.
12) Draw a saving-investment diagram to show how each of the following changes shifts the IS
curve.
(a) Future income rises.
(b) The future marginal productivity of capital increases.
(c) Government purchases decrease temporarily.
9.3 The LM Curve
1) A rise in the price of a bond causes the yield of the bond to
A) rise.
B) fall.
C) remain unchanged.
D) rise if it’s a short-term bond, fall if it’s a long-term bond.
2) A decline in the price of a bond causes the yield of the bond to
A) rise.
B) fall.
C) remain unchanged.
D) rise if it’s a short-term bond, fall if it’s a long-term bond.
3) The LM curve
A) is horizontal.
B) is vertical.
C) slopes downward.
D) slopes upward.
4) Looking only at the asset market, an increase in output would cause
A) the LM curve to shift down and to the right.
B) the LM curve to shift up and to the left.
C) an increase in the real interest rate along the LM curve.
D) a decrease in the real interest rate along the LM curve.
5) A change that increases the real money supply relative to real money demand causes
A) the LM curve to shift down and to the right.
B) the LM curve to shift up and to the left.
C) the IS curve to shift down and to the left.
D) the IS curve to shift up and to the right.
6) A change that increases real money demand relative to the real money supply causes
A) the LM curve to shift down and to the right.
B) the LM curve to shift up and to the left.
C) the IS curve to shift down and to the left.
D) the IS curve to shift up and to the right.
7) Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%. This
action would
A) increase money demand, shifting the LM curve up and to the left.
B) increase money demand, shifting the LM curve down and to the right.
C) decrease money demand, shifting the LM curve up and to the left.
D) decrease money demand, shifting the LM curve down and to the right.
8) You have just read that the Federal Reserve has increased the money supply to avoid a
recession. For a given price level, you would expect the LM curve to
A) shift up and to the left as the real money supply falls.
B) shift up and to the left as the real money supply rises.
C) shift down and to the right as the real money supply falls.
D) shift down and to the right as the real money supply rises.
9) The Fed has announced that it plans to lower the rate of monetary growth from 10% per year
to 2% per year. You would expect this announcement to directly
A) increase money demand, shifting the LM curve up and to the left.
B) increase money demand, shifting the LM curve down and to the right.
C) decrease money demand, shifting the LM curve up and to the left.
D) decrease money demand, shifting the LM curve down and to the right.
10) The probably effect of introducing an increased number of automatic teller machines is to
A) increase money demand, shifting the LM curve up and to the left.
B) increase money demand, shifting the LM curve down and to the right.
C) decrease money demand, shifting the LM curve up and to the left.
D) decrease money demand, shifting the LM curve down and to the right.
11) If the money supply is increased, which curve shifts in the IS-LM model? What direction
does it shift? What is the intuition behind this shift?
9.4 General Equilibrium
1) An increase in wealth that doesn’t affect labor supply would cause the IS curve to ________
and the FE line to ________.
A) shift down and to the left; be unchanged
B) shift down and to the left; shift left
C) shift up and to the right; be unchanged
D) shift up and to the right; shift left
2) An increase in the effective tax rate on capital would cause the IS curve to ________ and the
LM curve to ________.
A) shift down and to the left; be unchanged
B) shift down and to the left; shift up and to the left
C) shift up and to the right; be unchanged
D) shift up and to the right; shift up and to the left
3) When all markets in the economy are simultaneously in equilibrium, we say
A) markets are complete.
B) markets are perfect.
C) there is disequilibrium.
D) there is general equilibrium.
4) To reach general equilibrium, the price level adjusts to shift the ________ until it intersects
with the ________.
A) IS curve; FE line and LM curve
B) FE line; LM and IS curves
C) LM curve; FE line and IS curve
D) ND curve; FE line and NS curve
5) What adjusts to restore general equilibrium after a shock to the economy?
A) The LM curve
B) The IS curve
C) The FE line
D) The labor supply curve
6) The IS–LM model predicts that a temporary beneficial supply shock
A) increases output, national saving, and investment, but not the real interest rate.
B) increases output, national saving, and the real interest rate, but not investment.
C) increases the real interest rate, investment, and output, but not national saving.
D) increases output, national saving, investment, and the real interest rate.
7) A temporary supply shock, such as a bumper crop, would
A) shift the FE line to the right and leave the IS curve unchanged.
B) shift the FE line to the left and shift the IS curve up and to the right.
C) shift the FE line to the left and leave the IS curve unchanged.
D) have no effect on the FE line.
8) A temporary supply shock, such as an increase in oil prices, would
A) shift the IS curve down and to the left and leave the FE line unchanged.
B) shift the IS curve down and to the left and shift the FE line to the left.
C) shift the IS curve up and to the right, but leave the FE line unchanged.
D) have no effect on the IS curve.
9) You have just read that Australia has suffered a drought, destroying its wheat crop for this
year. The effect of this adverse supply shock on Australia would probably be
A) an increase in prices and an increase in real interest rates.
B) an increase in prices, an increase in nominal interest rates, but a decrease in real interest rates.
C) a decrease in prices and a decrease in real interest rates.
D) a decrease in prices, a decrease in nominal interest rates, but an increase in real interest rates.
10) A temporary adverse supply shock directly causes
A) a shift down and to the left of the IS curve.
B) a shift to the left of the FE line.
C) a shift down and to the right of the LM curve.
D) a shift up and to the right of the IS curve.
11) After a temporary beneficial supply shock hits the economy, general equilibrium is restored
by
A) a shift down and to the left of the IS curve.
B) a shift to the left of the FE line.
C) a shift up and to the left of the LM curve.
D) a shift down and to the right of the LM curve.
12) An adverse supply shock that is permanent shifts which curve in addition to the curves
shifted by one that is temporary?
A) The LM curve
B) The IS curve
C) The FE line
D) The labor demand curve
13) Which market adjusts the quickest in response to shocks to the economy?
A) The asset market
B) The labor market
C) The goods market
D) The asset, labor, and goods markets adjust at about the same speed to eliminate a
disequilibrium in the macroeconomy.
14) A temporary decrease in government purchases causes the real interest rate to ________ and
output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
15) An increase in expected inflation causes the real interest rate to ________ and output to
________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
16) Suppose the intersection of the IS and LM curves is to the left of the FE line. A decrease in
the price level would most likely eliminate a disequilibrium among the asset, labor, and goods
markets by
A) shifting the LM curve down and to the right.
B) shifting the IS curve up and to the right.
C) shifting the IS curve down and to the left.
D) shifting the FE curve to the left.