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Exam 22: Is-Lm in Action

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Question 31

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Explain the difference between fiscal policy and monetary policy.

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Fiscal policy refers to factor...

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Question 32

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If the monetary authority wants to mitigate the effects of an unstable IS curve on output, it must accept the necessity of changes in the money supply.

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Question 33

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A change in the price level shifts

Equilibrium output will rise and the equilibrium interest rate will fall if

A financial panic would cause _____ to shift to the right.

An increase in the price level affects the LM curve because of its impact on consumption.

Crowding out implies that an increase in government spending affects only the price level and not output.

Using an IS-LM graph starting from the natural rate of output, show the impact of an increase in taxes in the short run and the long run. What does this say about the effectiveness of policy?

Fiscal policy cannot raise output above the natural rate in the

In the IS-LM model, policy is said to be ineffective in the long run because it cannot change

If investment spending is unstable, to stabilize output the central bank should target the

The AD curve

An increase in autonomous investment causes the ____ and _____ curves to shift to the right.

A decrease in output shifts the LM curve to the right.

Explain why aggregate demand slopes down in terms of the IS-LM model.

Show a graph where an increase in the money supply and an increase in government spending lead to an increase in the equilibrium interest rate in the short run. What is required for this to happen?

The graph above shows an increase in government spending. Crowding out is apparent since the change in output from _____ is less than the change in output from

Government spending and the money supply both fall. As a result, the equilibrium interest rate must

When the Fed increases the money supply, what happens to investment? How is this shown on an IS-LM graph?

If financial panics are the greatest concern for monetary policymakers, an interest rate target is superior to a money supply target.