Question 1

Which of the following best describes the IS curve in the IS-LM model?

Accepted Answer

It shows combinations of income ($$Y) $$and interest rates ($$i) $$where the goods market is in equilibrium.

Question 2

Suppose the government increases its spending ($$G) $$while the central bank keeps the interest rate constant. What is the expected effect on the IS and LM curves?

Accepted Answer

The IS curve shifts to the right, while the LM curve remains unchanged.

Question 3

Which equation represents the equilibrium in the goods market according to the IS-LM model?

Accepted Answer

$$Y = C(Y-T) + I(Y, i) + G$$

Question 4

If the central bank lowers the policy interest rate, what is the immediate effect on the LM curve and the equilibrium in the IS-LM model?

Accepted Answer

The LM curve shifts downward, leading to higher equilibrium output ($$Y) $$and a lower interest rate ($$i).$$

Question 5

During the 2001 'dot-com' crisis, the US responded with both expansive fiscal and monetary policy. According to the IS-LM model, what was the combined effect of these policies?

Accepted Answer

The IS curve shifted right and the LM curve shifted downward, both increasing output ($$Y).$$

Question 6

Which of the following would cause a movement along the IS curve, rather than a shift of the curve?

Accepted Answer

A change in the interest rate ($$i) $$set by the central bank.

Question 7

If the central bank follows a strict interest rate rule ($$i = i_0$), how does the LM curve appear in the IS-LM diagram?

Accepted Answer

As a horizontal line at $$i = i_0$

Question 8

Which of the following scenarios would shift the IS curve to the left?

Accepted Answer

An increase in taxes ($$T) $$with all other factors constant.

Question 9

In the IS-LM model, what is the effect of a restrictive (contractionary) monetary policy if the economy is initially at equilibrium?

Accepted Answer

The LM curve shifts upward, leading to a higher interest rate ($$i) $$and lower output ($$Y).$$

Question 10

Suppose the central bank wants to keep output ($$Y) $$stable despite a large reduction in government spending ($$G). $$According to the IS-LM model, which policy mix would best achieve this goal?

Accepted Answer

A combination of contractionary fiscal policy (lower $$G) $$and expansionary monetary policy (lower $$i).$$

Question 11

Which of the following best explains why the IS curve is downward sloping in the IS-LM model?

Accepted Answer

A higher interest rate ($$i) $$reduces investment ($$I$$), which lowers aggregate demand and output ($$Y).$$

Question 12

During the German reunification in 1990, which combination of policies was observed according to the IS-LM model?

Accepted Answer

Expansive fiscal policy (rightward IS shift) and restrictive monetary policy (upward LM shift).

Question 13

Which of the following is a plausible real-world example of a factor that would shift the LM curve upward?

Accepted Answer

The central bank raises the policy interest rate to combat inflation.

Question 14

If the money market is in equilibrium, which equation must hold?

Accepted Answer

$$M/P = L(Y, i)$$

Question 15

Which of the following best describes the effect of a tax cut in the IS-LM model, assuming the central bank keeps the interest rate constant?

Accepted Answer

The IS curve shifts to the right, increasing output ($$Y) at $$the given interest rate.

Question 16

Which of the following statements about the empirical evidence from the 2001 'dot-com' crisis is supported by the IS-LM model?

Accepted Answer

The US economy recovered faster than the Eurozone due to more aggressive fiscal and monetary stimulus.

Question 17

Which of the following is NOT a direct determinant of the position of the IS curve?

Accepted Answer

The central bank's policy interest rate rule.

Question 18

If the central bank wants to offset the negative output effects of a fiscal contraction (e.g., a reduction in $$G$$), what should it do according to the IS-LM model?

Accepted Answer

Lower the policy interest rate to shift the LM curve downward.

Question 19

Which of the following best explains why the LM curve is horizontal under a strict interest rate policy by the central bank?

Accepted Answer

The central bank adjusts the money supply to keep the interest rate constant, regardless of changes in income ($$Y).$$

IS-LM Model: Goods and Financial Markets in Macroeconomics

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