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Exam 26: The ISLM Model

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Question 41

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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

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Question 42

Multiple Choice

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If the economy is characterized by a certain and stable LM curve,then ________ target produces ________ fluctuations in aggregate output.

A) an interest rate; smaller
B) a money supply; smaller
C) a money supply; larger
D) an exchange rate; larger

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Question 43

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In the long-run ISLM model and with everything else held constant,as long as the level of output ________ the natural rate level,the price level will continue to ________,shifting the LM curve to the ________,until finally output is back at the natural rate level.

Macroeconomic equilibrium requires

Everything else held constant,a monetary contraction is characterized by ________ output and ________ interest rates.

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.

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 ________.

Using the ISLM model,show graphically and explain the effects of a monetary contraction.What is the effect on the equilibrium interest rate and level of output?

Everything else held constant,a monetary expansion is characterized by ________ output and ________ interest rates.

In the long-run ISLM model and with everything else held constant,the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate.

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.

Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.

If the ________ curve is relatively more unstable than the ________ curve,a money supply target is preferred.

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 ________.

If the Federal Reserve conducts open market ________,the money supply ________,shifting the LM curve to the left,everything else held constant.

Using the ISLM model,explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate.What is this effect called?

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

In the long-run ISLM model and with everything else held constant,the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate.

If an economy experiences high interest rates and high unemployment,the ISLM framework predicts that ________ policy has been too ________.

If the price level increases,everything else held constant,the ________ curve shifts to the ________.