Chapter 25

Money and Economic Stability in the ISLM World

D2Factual
1. Monetarists argue that aggregate demand is A) vertical. B) horizontal. C) relatively unaffected by autonomous spending shifts. D) relatively unaffected by changes in the money supply. Answer C

D2Factual
!. Monetarists argue that the demand for money is unresponsive to interest rates" i.e. depends on income only" produces a A) vertical #M function. B) horizontal #M function. C) vertical $% function. D) horizontal $% function. Answer A

D2Interpretive
&. $f the #M function is vertical" then '''''''''''''''''' is constant. A) the price level B) the interest rate C) velocity D) investment Answer C

D2Factual
(. Monetarists argue that stability in the economy is maintained by fluctuations in A) velocity. B) money demand. C) money supply. D) the price level. Answer D

54

55)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D3Interpretive
-. .hen the #M curve is vertically sloped" the '''''''''''''''''' in income due to a change in the money supply will be '''''''''''''''''' when the #M curve is positively sloped" but not vertical. A) decrease/ greater B) decrease/ smaller C) increase/ greater D) increase/ smaller Answer C

D2Applied
0. .ith velocity constant and e1ual to !" a 213 billion increase in the money supply shifts the #M curve to the right by A) 2! billion. B) 2- billion. C) 213 billion. D) 2!3 billion. Answer D

D2Applied
4. $f velocity is constant and e1ual to !" a 213 billion shift of the #M curve to the left will be produced by a '''''''''''''''''' in the money supply. A) 2- billion increase B) 2- billion decrease C) 2!3 billion increase D) 2!3 billion decrease Answer B

D2Applied
5. $f velocity is constant and e1ual to -" a 2!3 billion shift of the #M curve to the right will be produced by a '''''''''''''''''' in the money supply. A) 2133 billion increase B) 2133 billion decrease C) 2( billion increase D) 2( billion decrease Answer C

D2Factual
6. .ith velocity constant" an increase in the money supply multiplied by velocity yields the increase in e1uilibrium A) interest rates. B) money demand. C) price level. D) income. Answer D

Chapter !-Money and ,conomic %tability in the ISLM .orld56

D2Interpretive
13. Monetary policy has no effect on the e1uilibrium interest rate if A) the inflation rate is zero. B) the economy is in the li1uidity trap. C) velocity is constant. D) the economy is at full employment. Answer B

D2Factual
11. .hen the economy is in the li1uidity trap" the A) #M curve is horizontal. B) #M curve is vertical. C) $% curve is horizontal. D) $% curve is vertical. Answer A

D2Interpretive
1!. 7iscal policy is most effective when A) the #M curve is vertical. B) the #M curve is horizontal. C) the #M curve is positively sloped. D) the #M curve is negatively sloped. Answer B

D2Interpretive
1&. $f investment is interest8insensitive" A) monetary policy has no impact on e1uilibrium income. B) monetary policy has no impact on the e1uilibrium interest rate. C) fiscal policy has no impact on e1uilibrium income. D) fiscal policy has no impact on the e1uilibrium interest rate. Answer A

D2Interpretive
1(. $f investment becomes more interest8sensitive" A) monetary policy will have a smaller impact on the e1uilibrium interest rate. B) monetary policy will have a greater impact on e1uilibrium income. C) fiscal policy will have a smaller impact on e1uilibrium income. D) fiscal policy will have a larger impact on the e1uilibrium interest rate. Answer B

D2Interpretive
1-. Monetary policy has no effect on e1uilibrium income when the A) #M curve is positively sloped. B) $% curve is negatively sloped. C) $% curve is vertical. D) $% curve is horizontal. Answer C

57)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D2Interpretive
10. A vertical #M curve means that A) monetary policy has no impact on the interest rate. B) monetary policy has no impact on income. C) fiscal policy has no impact on the interest rate. D) fiscal policy has no impact on income. Answer D

D2Applied
14. $f you believe that the #M curve is horizontal" what type of policy would you recommend to stimulate the economy9 A) An increase in government spending B) A reduction in government spending C) An increase in the money supply D) A reduction in the interest rate Answer A

D2Applied
15. $f you believe that the #M curve is vertical" what type of policy would you recommend to stimulate the economy9 A) An increase in government spending B) A reduction in government spending C) An increase in the money supply D) A reduction in the interest rate Answer C

D2Interpretive
16. :he e;penditure multiplier is smallest when the A) #M curve is positively sloped. B) #M curve is horizontal. C) $% curve is vertical. D) #M curve is vertical. Answer D

D2Interpretive
!3. :he e;penditure multiplier is greatest when the A) #M curve is positively sloped. B) #M curve is horizontal. C) $% curve is vertical. D) #M curve is vertical. Answer B

Chapter !-Money and ,conomic %tability in the ISLM .orld58

D2Interpretive
!1. :he e;penditure multiplier in the $%#M framewor< is smaller than that derived from the simple =eynesian model because A) velocity is always assumed to be constant. B) the economy is assumed to be in the li1uidity trap. C) the aggregate supply curve is assumed to be horizontal. D) the #M curve is assumed to have a positive slope. Answer D

D2Interpretive
!!. A horizontal #M curve implies that the e;penditure multiplier" when compared with the simple =eynesian e;penditure multiplier" is A) smaller. B) larger. C) e1ual. D) e1ual to the inverse of the simple multiplier. Answer C

D2Interpretive
!&. An upward8sloping #M curve implies that the e;penditure multiplier" when compared with the simple =eynesian e;penditure multiplier" is A) smaller. B) larger. C) e1ual. D) e1ual to the inverse of the simple multiplier. Answer A

D3Interpretive
!(. A relatively flat #M curve implies that wide fluctuations in the goods sector cause A) wide fluctuations in real output. B) wide fluctuations in the price level. C) wide fluctuations in the interest rate. D) crowding out of private investment. Answer A

D3Interpretive
!-. A relatively steep #M curve implies that wide fluctuations in the goods sector cause A) wide fluctuations in real output. B) wide fluctuations in the price level. C) wide fluctuations in the interest rate. D) crowding out of private investment. Answer C

59)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D2Interpretive
!0. 7luctuating interest rates tend to stabilize real output when the A) $% curve is flat. B) $% curve is steep. C) #M curve is flat. D) #M curve is steep. Answer D

D2Interpretive
!4. 7luctuating interest rates tend to cause large changes in real output when the A) $% curve is flat. B) $% curve is steep. C) #M curve is flat. D) #M curve is steep. Answer C

D2Interpretive
!5. An increase in autonomous spending is sure to reduce the real money supply when A) the economy is in the li1uidity trap. B) the $% curve is vertical. C) the economy is at full employment. D) velocity is constant. Answer C

D2Interpretive
!6. )eal economic activity at full employment is unaffected by changes in investment spending when A) interest rates are low. B) velocity is fle;ible. C) inventories are low. D) prices are fle;ible. Answer D

D2Interpretive
&3. A horizontal #M curve implies that the e;penditure multiplier" when compared with the simple =eynesian e;penditure multiplier" is A) smaller. B) larger. C) e1ual. D) e1ual to the inverse of the simple multiplier. Answer C

Chapter !-Money and ,conomic %tability in the ISLM .orld60

D3Interpretive
&1. $f the economy is at full employment" anything that causes the level of income to change will cause fluctuations in the '''''''''''''''''' that will shift the '''''''''''''''''' curve and thus help stabilize economic activity A) price level/ $% B) price level/ #M C) interest rate/ $% D) interest rate/ #M Answer B

D2Factual
&!. :he #M curve automatically shifts to the right when the intersection point of the $% and #M curves occurs at a point A) beyond full8employment income. B) in the li1uidity trap. C) less than full8employment income. D) where planned saving is less than planned investment. Answer A

D2Factual
&&. :he #M curve automatically shifts to the left when the intersection point of the $% and #M curves occurs at a point A) beyond full8employment income. B) in the li1uidity trap. C) less than full8employment income. D) where planned saving is less than planned investment. Answer C

D2Interpretive
&(. $f investment spending is interest8sensitive and highly unstable" the 7ederal )eserve could minimize fluctuations in income by targeting A) velocity. B) the interest rate. C) the money supply. D) government debt. Answer C

D2Interpretive
&-. $f the #M curve is sub>ect to wider fluctuations than the $% curve" the 7ederal )eserve could minimize ?D@ fluctuations by targeting A) money demand. B) money supply. C) the interest rate. D) the price level. Answer C

61)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D2Factual
&0. .hich of the following is not generally discussed at a Aspecial caseB of $%8#M analysis9 A) Corizontal $% B) Dertical $% C) Corizontal #M D) Dertical #M Answer A

D1Factual
&4. :he assumption of variable velocity translates to" in $%8#M analysis" '''''''''''''''''' curves. A) downward sloping $% B) vertical $% C) upward sloping #M D) vertical #M Answer C

D1Factual
&5. .ith a change in the money supply" a vertical #M curve shifts a horizontal distance e1ual to A) that change. B) that change times velocity. C) that change divided by velocity. D) that change times the simple =eynesian multiplier. Answer B

D2Interpretive
&6. A$f the money supply rises by 21 billion" ?D@ will rise until it alone increases the 1uantity of money demanded by 21 billion.B :his describes the situation when A) an $% curve shifts against a horizontal #M curve. B) an $% curve shifts against a vertical #M curve. C) a vertical #M curve shifts against an $% curve. D) a horizontal #M curve shifts against an $% curve. Answer C

D3Interpretive
(3. .ith an upward sloping #M curve" a falling interest rate '''''''''''''''''' money demand" so that an e;pansionary monetary policy is '''''''''''''''''' than in the case of a vertical #M curve. A) raises/ stronger B) raises/ wea<er C) has no effect on/ stronger D) has no effect on/ wea<er Answer B

Chapter !-Money and ,conomic %tability in the ISLM .orld62

D3Interpretive
(1. .ith an upward sloping #M curve" a rising interest rate '''''''''''''''''' money demand" so that a contractionary monetary policy is '''''''''''''''''' than in the case of a vertical #M curve. A) raises/ stronger B) raises/ wea<er C) lowers/ stronger D) lowers/ wea<er Answer D

D2Interpretive
(!. $f investment has a low sensitivity to the interest rate" the $% curve is rather ''''''''''''''''''" so that monetary policy has a '''''''''''''''''' effect on ?D@. A) flat/ strong B) flat/ wea< C) steep/ strong D) steep/ wea< Answer D

D2Interpretive
(&. $f investment has a high sensitivity to the interest rate" the $% curve is rather ''''''''''''''''''" so that monetary policy has a '''''''''''''''''' effect on ?D@. A) flat/ strong B) flat/ wea< C) steep/ strong D) steep/ wea< Answer A

D2Factual
((. $n a li1uidity trap" e;pansionary monetary policy has '''''''''''''''''' effect on output" and e;pansionary fiscal policy has '''''''''''''''''' effect on output. A) no/ no B) no/ a strong C) a strong/ no D) a strong/ strong Answer B

D3Factual
(-. $f we are in a horizontal region of the money demand curve" e;pansionary monetary policy has '''''''''''''''''' effect on output and e;pansionary fiscal policy has '''''''''''''''''' effect on output. A) no/ no B) no/ a strong C) a strong/ no D) a strong/ a strong Answer B

63)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D1Factual
(0. 7iscal policy is impotent when the #M curve is A) vertical. B) horizontal. C) downward8sloping. D) horizontal or downward8sloping. Answer A

D1Factual
(4. Monetary policy is impotent when the #M curve is A) vertical. B) horizontal. C) downward8sloping. D) horizontal or downward8sloping. Answer B

D2Factual
(5. A@artialB crowding out of fiscal policy occurs when the A) #M curve is horizontal. B) #M curve is upward8sloping. C) #M curve is vertical. D) $% curve is vertical. Answer B

D2Factual
(6. ACompleteB crowding out of fiscal policy occurs when the A) #M curve is horizontal. B) #M curve is upward8sloping. C) #M curve is vertical. D) $% curve is vertical. Answer C

D2Factual
-3. $n the $%8#M model" the e;penditure multiplier is E1*F1 G b)H when the A) #M curve is horizontal. B) #M curve is upward8sloping. C) #M curve is vertical. D) $% curve is vertical. Answer A

D2Factual
-1. $n an $%8#M model with an upward8sloping #M curve and a downward8sloping $%" how does the e;penditure multiplier compare to E1*F1 G b)H9 A) $t is e1ual to it. B) $t is greater. C) $t is smaller. D) Cannot be answered with the information given Answer A

Chapter !-Money and ,conomic %tability in the ISLM .orld64

D1Factual
-!. Most economists believe the #M curve to be A) horizontal most of the time. B) upward8sloping. C) vertical. D) downward8sloping. Answer B

D2Interpretive
-&. :he natural rate of interest is the rate A) which e1uates saving and investment under any employment condition. B) which e1uates saving and investment with acceptable" but low" unemployment. C) which e1uates saving and investment at an unemployment rate of - percent or less. D) which e1uates saving and investment at full employment. Answer D

D2Factual
-(. %uppose the $% curve shifts bac< and forth. .ith a flat #M curve you get '''''''''''''''''' variability in the output and '''''''''''''''''' variability in the interest rate than you get with a steep #M curve. A) more/ more B) more/ less C) less/ more D) less/ less Answer B

D2Factual
--. %uppose the $% curve shifts bac< and forth. .ith a steep #M curve you get '''''''''''''''''' variability in the interest rate and '''''''''''''''''' variability in output than you get with a flat #M curve. A) more/ more B) more/ less C) less/ more D) less/ less Answer C

D3Interpretive
-0. :he economy tends to be more stable with a '''''''''''''''''' #M curve causing interest rates to be rather '''''''''''''''''' to shifts in the $% curve. A) steeper/ sensitive B) steeper/ insensitive C) flatter/ sensitive D) flatter/ insensitive Answer A

65)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D3Interpretive
-4. :he economy tends to be less stable with a '''''''''''''''''' #M curve causing interest rates to be rather '''''''''''''''''' to shifts in the $% curve. A) steeper/ sensitive B) steeper/ insensitive C) flatter/ sensitive D) flatter/ insensitive Answer D

D2Interpretive
-5. %uppose that $% and #M intersect at full8employment output. A rightward shift of $% will be followed by a '''''''''''''''''' price level that shifts #M to the '''''''''''''''''' in a return to full8employment. A) rising/ right B) rising/ left C) falling/ right D) falling/ left Answer B

D2Interpretive
-6. %uppose that $% and #M intersect at full8employment output. A leftward shift of $% will be followed by a '''''''''''''''''' price level that shifts #M to the '''''''''''''''''' in a return to full employment. A) rising/ right B) rising/ left C) falling/ right D) falling/ left Answer C

D2Interpretive
03. %uppose that $% and #M intersect at full8employment output. A rightward shift of #M will be followed by a '''''''''''''''''' price level that shifts #M to the '''''''''''''''''' in a return to full employment. A) rising/ right B) rising/ left C) falling/ right D) falling/ left Answer B

D2Interpretive
01. %uppose that $% and #M intersect at full8employment output. A leftward shift of #M will be followed by a '''''''''''''''''' price level that shifts #M to the '''''''''''''''''' in a return to full employment. A) rising/ right B) rising/ left C) falling/ right D) falling/ left Answer C

Chapter !-Money and ,conomic %tability in the ISLM .orld66

D2Interpretive
0!. AA rise in the money supply raised output in the short run" but left output unaffected in the long run.B :his statement implies that the price level '''''''''''''''''' in the long run" causing the interest rate to ''''''''''''''''''. A) rose/ rise B) rose/ fall C) fell/ rise D) fell/ fall Answer A

D2Interpretive
0&. AA drop in the money supply lowered output in the short run" but left output unaffected in the long run.B :his statement implies that the price level '''''''''''''''''' in the long run" causing the interest rate to ''''''''''''''''''. A) rose/ rise B) rose/ fall C) fell/ rise D) fell/ fall Answer D

D2Interpretive
0(. AA rise in government e;penditures raised output in the short run" but left output unaffected in the long run.B :his statement implies that the price level '''''''''''''''''' in the long run" causing the interest rate to ''''''''''''''''''. A) rose/ rise B) rose/ fall C) fell/ rise D) fell/ fall Answer A

D2Interpretive
0-. AA drop in government e;penditures lowered output in the short run" but left output unaffected in the long run.B :his statement implies that the price level '''''''''''''''''' in the long run" causing the interest rate to ''''''''''''''''''. A) rose/ rise B) rose/ fall C) fell/ rise D) fell/ fall Answer D

D1Factual
00. :he rate of interest that e1uates saving and investment at full employment is called the A) real rate. B) nominal rate. C) natural rate. D) discount rate. Answer C

67)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D1Factual
04. :he natural rate of interest is the interest rate that A) is determined by the intersection of the $% and #M curves. B) e1uates investment and saving at full employment. C) e1uates the supply and demand for money. D) is changed only by changes in the money supply. Answer B

D2Interpretive
05. .hich of the following will increase the natural rate of interest9 A) An increase in the saving rate B) A decrease in inflationary e;pectations C) An increase in government spending D) A decrease in the money supply Answer C

D2Interpretive
06. .hen money supply ''''''''''''''''''" the real rate of interest ''''''''''''''''''. A) increases/ falls B) increases/ rises C) decreases/ rises D) increases/ remains unchanged Answer D

D2Interpretive
43. .hich of the following will decrease the natural rate of interest9 A) An increase in ta;es B) An increase in investment spending C) A decrease in inflationary e;pectations D) An increase in the money supply Answer B

D1Interpretive
41. :he natural rate of interest rises with a '''''''''''''''''' shift of the '''''''''''''''''' curve. A) rightward/ $% B) rightward/ #M C) leftward/ $% D) leftward/ #M Answer A

Chapter !-Money and ,conomic %tability in the ISLM .orld68

D1Factual
4!. :he natural rate of interest falls with a '''''''''''''''''' shift of the '''''''''''''''''' curve. A) rightward/ $% B) rightward/ #M C) leftward/ $% D) leftward/ #M Answer C

D1Interpretive
4&. A rise in government e;penditure '''''''''''''''''' the natural rate of interest. A) lowers B) raises C) has no effect on D) has an uncertain effect on Answer B

D1Interpretive
4(. A rise in the money supply '''''''''''''''''' the natural rate of interest. A) lowers B) raises C) has no effect on D) has an uncertain effect on Answer C

D1Factual
4-. :he natural rate of interest is a '''''''''''''''''' rate that '''''''''''''''''' inflationary e;pectations. A) nominal/ includes B) nominal/ e;cludes C) real/ includes D) real/ e;cludes Answer D

D2Factual
40. .hen the economy is at full employment '''''''''''''''''' interest rates are '''''''''''''''''' by an e;pansionary monetary policy if inflationary e;pectations are generated. A) real/ decreased B) real/ not changed C) nominal/ decreased D) nominal/ not changed Answer B

69)itter*%ilber*+dell Money, Banking, and Financial Markets " ,leventh ,dition

D2Factual
44. .hen the economy is at full employment '''''''''''''''''' interest rates are '''''''''''''''''' by an e;pansionary monetary policy if inflationary e;pectations are generated. A) real/ decreased B) real/ increased C) nominal/ decreased D) nominal/ increased Answer D

D2Interpretive
45. %tarting from full employment output" fiscal policy will be completely crowded out in real terms" even with '''''''''''''''''' #M curve" so long as prices are . A) a vertical/ fle;ible B) a vertical/ fi;ed C) an upward8sloping/ fle;ible D) an upward8sloping/ fi;ed Answer C

D3Factual
46. Monetarists believe in a relatively unstable '''''''''''''''''' curve" and thus recommend a monetary policy targeting the ''''''''''''''''''. A) $%/ money supply B) $%/ interest rate C) #M/ money supply D) #M/ interest rate Answer A

D3Factual
53. =eynesians believe in a relatively stable '''''''''''''''''' curve" and thus recommend a monetary policy targeting the ''''''''''''''''''. A) $%/ money supply B) $%/ interest rate C) #M/ money supply D) #M/ interest rate Answer D

D3Interpretive
51. :he 1uantity of money demanded suddenly increases at every combination of ?D@ and interest rate. $f the 7ed holds to an unchanged money supply target" the interest rate '''''''''''''''''' and ?D@ ''''''''''''''''''. A) rises/ falls B) rises/ remains unchanged C) remains unchanged/ remains unchanged D) remains unchanged/ falls Answer A

Chapter !-Money and ,conomic %tability in the ISLM .orld70

D3Interpretive
5!. :he 1uantity of money demanded increases at every combination of ?D@ and interest rate. $f the 7ed holds to an unchanged interest rate target" the interest rate '''''''''''''''''' and ?D@ ''''''''''''''''''. A) rises/ falls B) rises/ remains unchanged C) remains unchanged/ remains unchanged D) remains unchanged/ falls Answer C

D3Interpretive
5&. :he 1uantity of money demanded decreases at every combination of ?D@ and interest rate. $f the 7ed holds to an unchanged money supply target" the interest rate '''''''''''''''''' and ?D@ ''''''''''''''''''. A) rises/ rises B) rises/ falls C) falls/ rises D) falls/ falls Answer C

D3Interpretive
5(. :he 1uantity of money demanded increases at every combination of ?D@ and interest rate. $f the 7ed holds to an unchanged interest rate target" the interest rate '''''''''''''''''' and ?D@ ''''''''''''''''''. A) rises/ falls B) rises/ remains unchanged C) remains unchanged/ remains unchanged D) remains unchanged/ falls Answer C

D3Interpretive
5-. :he amount of investment demand at each interest rate falls. $f the 7ed holds to an unchanged interest rate target" the change in ?D@ is '''''''''''''''''' if it had held to an unchanged money supply target. A) greater than B) less than C) the same as Answer A

D3Interpretive
50. :he amount of investment demand at each interest rate suddenly falls. $f the 7ed holds to an unchanged money supply target" the change in ?D@ is '''''''''''''''''' if it had held to an unchanged interest rate target. A) greater than B) less than C) the same as Answer B