PART I : TRUE OR FALSE
_____ 1. The equilibrium level of GDP will depend on the level of the real interest rate.
_____ 2. The interest rate is determined by the supply and demand for real money balances.
_____ 3. The nominal interest rate is equal to the real rate of interest minus the inflation rate.
_____ 4. Changes in the money market will not cause changes in the goods market.
_____ 5. The investment demand curve shows how changes in the nominal interest rate will effect the demand for real balances.
_____ 6. In the goods market, an increase in the level of GDP will tend to cause an increase in the interest rate.
_____ 7. The IS curve will have a negative slope.
_____ 8. The flatter the slope of the Investment Demand curve (II), the steeper will be the slope of the IS curve.
_____ 9. Anything that shifts the Aggregate Planned Expenditure Curve upwards will also shift the IS curve upwards.
_____ 10. The money market will be in equilibrium when the demand for real balances (LL) is equal to the nominal money supply (M).
_____ 11. The LM schedule shows the different combinations of GDP and interest rates at which the money market is in equilibrium.
_____ 12. The LM curve describes changes in interest rates that are caused by changes in GDP.
_____ 13. The more sensitive is the demand for real balances to changes in the level of GDP, the steeper will be the slope of the LM curve.
_____ 14. An increase in the supply of real money (L) will tend to shift upward the LM curve.
_____ 15. An increase in real GDP will tend to shift downward the LM curve.
_____16. The equilibrium formed by the intersection of the IS and LM curve is highly unstable.
______ 17. The effect of an increase in Government purchases of goods and services can be analyzed as happening in two rounds. In the first round GDP, increases. In the second round, Investment decreases.
_____ 18. In general, the first-round impact on GDP tends to be larger than the second-round effects on GDP.
_____ 19. In general, the second-round effects of monetary policy on GDP tend to be in the same direction as the first round effects.
_____ 20. The "crowding out" effect of expansionary fiscal policy would be complete if the LM curve were vertical.
_____ 21. Expansionary fiscal policy can only "Crowd out" investment. It cannot "Crowd in" investment.
_____ 22. Expansionary fiscal policy is likely to encourage additional net exports.
______ 23. The effect of an increase in the nominal money supply can be analyzed as happening in two rounds. In the first round Investment increases. In the second round, interest rates decrease.
_____ 24. The international effect of expansionary monetary policy will tend to reinforce the domestic effect of that policy.
_____ 25. Both expansionary fiscal policies and expansionary monetary policies tend to expand Investment spending.
_____ 26. Keynesian economists generally believed that fiscal policy was ineffective and monetary policy was very effective.
_____ 27. Fiscal policy will be very effective if Investment spending is very sensitive to changes in interest rates.
_____ 28. The flatter the IS curve, the more effective will be monetary policy.
_____ 29. The Investment demand curve (II) will be more sensitive to changes in interest rates if other factors can easily be substituted for capital
_____ 30. Extreme Keynesians thought that the demand curve for real balances (LL) was horizontal.
PART II: FILL IN THE BLANKS
1. The equilibrium planned expenditure depends on the level of autonomous expenditure and the size of the
________________________________.
2. The equilibrium nominal rate of interest is determined in the __________________________ market and the equilibrium level of aggregate planned expenditure is determined in the goods market.
3. There is one particular level of both the interest rate and ________________________________________ that simultaneously produces money market equilibrium and expenditure equilibrium.
4. The IS curve shows the different combinations of real GDP and interest rates at which the ___________________________ market is in equilibrium.
5. The LM curve will have a ________________________ slope.
6. If the interest rate is below the IS-LM equilibrium rate, that will tend to increase Investment and GDP. The increase in GDP will then cause the interest rate to _________________________________.
7. The net result of an expansionary fiscal policy may be the increase of government spending and a decrease in Investment spending. This effect is called: __________________________.
8. International crowding out tends to reduce the effectiveness of
________________________ policy.
9. Fiscal policy becomes more _____________________ as the slope of the IS curve becomes steeper.
10. The extreme ____________________________ argued that the LM curve was nearly vertical and therefore fiscal policy would be almost totally ineffective.