Question 1

Which equation represents the IS relation in the IS-LM model, where output is determined by consumption, investment, and government spending?

Accepted Answer

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

Question 2

What is the primary reason the IS curve is downward sloping in the IS-LM model?

Accepted Answer

An increase in the interest rate $$i$$ leads to a decrease in investment and thus a decrease in output $$Y.$$

Question 3

If the central bank increases the money supply $$M$$, what is the immediate effect on the LM curve?

Accepted Answer

The LM curve shifts downward (or to the right), leading to a lower equilibrium interest rate.

Question 4

Which of the following best describes the effect of an increase in taxes $$T in $$the IS-LM model?

Accepted Answer

The IS curve shifts to the left, leading to a lower equilibrium output.

Question 5

Given the LM relation $$\frac{M}{P} = YL(i)$$, what happens to the equilibrium interest rate $$i if $$real income $$Y$$ increases, holding $$M$$ and $$P$$ constant?

Accepted Answer

The equilibrium interest rate $$i$$ increases.

Question 6

During the 2001 US recession, which combination of policies was used to stimulate the economy?

Accepted Answer

A cut in the federal funds rate and tax cuts (monetary and fiscal expansion).

Question 7

Suppose the government wants to reduce the budget deficit without causing a recession. According to the IS-LM model, which policy mix would be most effective?

Accepted Answer

A fiscal contraction (higher taxes or lower spending) combined with a monetary expansion (lower interest rates).

Question 8

Which of the following best explains why the ZZ curve in the goods market is flatter than the 45-degree line?

Accepted Answer

An increase in output leads to a less than one-for-one increase in demand.

Question 9

If the central bank targets the interest rate directly, what shape does the LM curve take in the IS-LM model?

Accepted Answer

Horizontal at the chosen interest rate.

Question 10

Which of the following is a likely short-run effect of a 1% increase in the federal funds rate, according to empirical evidence?

Accepted Answer

A decrease in retail sales, output, and employment, with little effect on the price level.

Question 11

Which step is NOT part of the standard approach for analyzing policy changes in the IS-LM model?

Accepted Answer

Predicting the effect on the exchange rate.

Question 12

If the government increases spending $$G$$ while the central bank keeps the interest rate constant, what is the effect on output $$Y in $$the IS-LM model?

Accepted Answer

Output $$Y$$ increases.

Question 13

Which of the following best describes the dynamic adjustment process in the IS-LM model after a policy shock?

Accepted Answer

Consumers and firms take time to adjust their consumption and investment decisions.

Question 14

In the IS-LM model, what is the effect of a simultaneous fiscal expansion and monetary contraction?

Accepted Answer

The IS curve shifts right and the LM curve shifts up, with ambiguous effects on output and interest rate.

Question 15

Which equation represents the LM relation in the IS-LM model?

Accepted Answer

$$\frac{M}{P} = YL(i)$$

Question 16

If the IS and LM curves intersect at point A, what does this represent?

Accepted Answer

Simultaneous equilibrium in both the goods and financial markets.

Question 17

Which of the following would shift the IS curve to the right?

Accepted Answer

An increase in government spending $$G.$$

Question 18

What is the effect of a monetary expansion on the IS-LM diagram if the central bank lowers the interest rate?

Accepted Answer

The LM curve shifts downward, leading to higher output.

The IS-LM Model: Goods and Financial Markets in Macroeconomics

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