SOLVED

24.3Â Â The Simultaneous Determination of Income and Interest: IS and LM together 1) Which of the following is an equilibrium condition in the ISLM model? A) Labor demand = labor supply B) Desired investment = desired saving C) Government spending = taxation D) Money supply = income 2) Which of the following is an equilibrium condition in the ISLM model? A) Labor demand = labor supply B) Actual saving = desired saving C) Government spending = taxation D) Money supply = money demand 3) Starting from equilibrium and using the ISLM framework, a decrease in investment leads to A) lower interest rates and higher income. B) higher interest rates and higher income. C) lower interest rates and lower income. D) higher interest rates and lower income. 4) Starting from equilibrium and using the ISLM framework, an increase in investment leads to A) lower interest rates and higher income. B) higher interest rates and higher income. C) lower interest rates and lower income. D) higher interest rates and lower income. 5) Starting from equilibrium in the ISLM framework, a decrease in money demand results in A) a rise in income and the interest rate. B) a rise in income and a decline in the interest rate. C) a decline in income and the interest rate. D) a decline in income and a rise in the interest rate. 6) Starting from equilibrium in the ISLM framework, an increase in money demand results in A) a rise in income and the interest rate. B) a rise in income and a decline in the interest rate. C) a decline in income and the interest rate. D) a decline in income and a rise in the interest rate. 7) In the ISLM framework, monetary policy has the greatest impact on equilibrium income when A) money demand = money supply. B) money demand is infinitely elastic. C) the interest rate is low. D) the investment function is highly interest-sensitive. 8) Under the Classical assumptions, an increase in government spending causes A) income to rise. B) income to fall. C) interest rates to rise. D) interest rates to fall. 9) In IS-LM analysis, the nominal interest rate is A) purely a monetary phenomenon. B) purely a real phenomenon. C) both a monetary and a real phenomenon. D) neither a real nor a monetary phenomenon, but determined by government policy. 10) “The price level may fall but it will not necessarily lower the interest rate, not if we are in a liquidity trap.” This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession. A) Classical; will B) Classical; may not be able to C) Keynesian; will D) Keynesian; may not be able to 11) “A lower price level may lower the interest rate, but investment demand may not respond to this.” This is a statement a __________ economist might make as an explanation of why the economy __________ pull out of a recession. A) Classical; will B) Classical; may not be able to C) Keynesian; will D) Keynesian; may not be able to 12) “Even if there is a liquidity trap or interest-insensitive investment, a falling price level will increase the real money supply and real wealth, and this impacts consumption.” This is a statement a __________ economist might make as an explanation of why the economy __________ pull itself out of a recession. A) Classical; will B) Classical; may not be able to C) Keynesian; will D) Keynesian; may not be able to