Chapter 24

The ISLM World

D1Factual
1. The transactions motive links money demand and A) interest rates. B) money supply. C) velocity. D) income. Answer: D

D2Interpretive
2. A weakness of the simple eynesian model is that it does not reco!ni"e that #ecause the transactions demand for money $$$$$$$$$$$$$$$$$$ as income increases% the interest rate $$$$$$$$$$$$$$$$$$ as income rises A) increases& increases B) increases& decreases C) decreases& increases D) decreases& decreases Answer: A

D1Applied
'. Assume that the Cam#rid!e k ( .2). *f income is e+ual to ,1))%)))% the transactions demand for money is e+ual to A) ,2)%))). B) ,-)%))). C) ,1))%))). D) ,-))%))). Answer: A

D1Applied
.. Assume that the Cam#rid!e k ( ).2-. *f the transactions demand for money is e+ual to ,2)%)))% then income is e+ual to A) ,2)%))). B) ,/)%))). C) ,1)%))). D) ,-%))). Answer: D

34

350itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D1Applied
-. Assume that the Cam#rid!e k ( ).2. *f income increases #y ,2)%)))% the demand for money will chan!e #y A) ,2)%))). B) ,1)%))). C) ,-%))). D) ,.%))). Answer: D

D2Factual
5. The two main determinants of money demand are A) 6D7 and the money supply. B) a!!re!ate supply and a!!re!ate demand. C) interest rates and income. D) the inflation rate and the money supply. Answer: C

D2Factual
8. The 9: curve represents com#inations of income and the interest rate at which A) money demand e+uals money supply when the money supply is fi;ed. B) money supply e+uals money demand when the money demand is fi;ed. C) money demand e+uals money supply when the money supply can vary. D) money supply e+uals money demand when #oth the money supply and money demand can vary. Answer: A

D2Factual
/. The 9: curve shows a series of income<interest rate com#inations at which there is e+uili#rium in the A) #ond market. B) !oods market. C) savin!<investment market. D) money market. Answer: D

D2Factual
=. The 9: curve shows points of e+uili#rium in the money market and com#inations of A) inflation and unemployment. B) a!!re!ate supply and a!!re!ate demand. C) income and the interest rate. D) money supply and money demand. Answer: C

Chapter 2.The ISLM >orld36

D2Interpretive
1). At $$$$$$$$$$$$$$$$$$ income levels on the 9: curve% the interest rate must #e $$$$$$$$$$$$$$$$$$. A) hi!her& lower B) lower& hi!her C) hi!her& unchan!ed D) hi!her& hi!her Answer: D

D3Interpretive
11. Alon! an 9: curve at hi!her income levels the transactions demand for money is $$$$$$$$$$$$$$$$$$% so the interest rate must #e $$$$$$$$$$$$$$$$$$ to e+uate the demand to the fi;ed supply of money. A) hi!her& hi!her B) hi!her& lower C) lower& hi!her D) lower& lower Answer: D

D3Interpretive
12. Alon! an 9: curve at lower income levels the transactions demand for money is $$$$$$$$$$$$$$$$$$% so the interest rate must #e $$$$$$$$$$$$$$$$$$ to e+uate the demand to the fi;ed supply of money. A) hi!her& hi!her B) hi!her& lower C) lower& hi!her D) lower& lower Answer: D

D3Interpretive
1'. Alon! an 9: curve at hi!her interest rates there is $$$$$$$$$$$$$$$$$$ money demanded% so income must #e hi!her to $$$$$$$$$$$$$$$$$$ the demand for transactions #alances if the total demand for money is to e+ual the fi;ed supply. A) less& decrease B) less& increase C) more& decrease D) more& increase Answer: B

D3Interpretive
1.. Alon! an 9: curve at lower interest rates there is $$$$$$$$$$$$$$$$$$ money demanded% so income must #e lower to $$$$$$$$$$$$$$$$$$ the demand for transactions #alances if the total demand for money is to e+ual the fi;ed supply. A) less& decrease B) less& increase C) more& decrease D) more& increase Answer: C

370itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D2Interpretive
1-. 9i+uidity preference theory indicates that at lower interest rates A) investment is !reater. B) money demand is !reater. C) consumption is !reater. D) money supply is !reater. Answer: B

D2Interpretive
15. ?or an individual 9: curve% the money supply is assumed to A) #e constant. B) !row at a rate e+ual to the interest rate. C) !row at a rate e+ual to the !rowth rate in income. D) !row at a rate e+ual to the mar!inal propensity to consume. Answer: A

D2Interpretive
18. >hich of the followin! influences the slope of the 9: curve@ A) The interest<sensitivity of money demand B) The interest<sensitivity of investment C) The interest<sensitivity of !overnment spendin! D) The interest<sensitivity of savin! Answer: A

D2Interpretive
1/. The slope of the 9: is not influenced #y A) the !ap #etween money demand and supply. B) the interest rate sensitivity of money supply. C) the interest rate sensitivity of money demand. D) The slope of the 9: curve is influenced #y all of the a#ove. Answer: B

D2Interpretive
1=. *n the 9: curve% the $$$$$$$$$$$$$$$$$$ the interest<sensitivity of li+uidity preference% the $$$$$$$$$$$$$$$$$$ the necessary increase in the rate of interest to restore e+uili#rium. A) !reater& smaller B) !reater& !reater C) smaller& smaller D) Aone of the a#ove Answer: A

Chapter 2.The ISLM >orld38

D2Interpretive
2). The slope of the 9: curve will #e steeper the $$$$$$$$$$$$$$$$$$ is the income<sensitivity of the demand for money and the $$$$$$$$$$$$$$$$$$ is the interest<sensitivity of the demand for money. A) less& less B) less& !reater C) !reater& less D) !reater& !reater Answer: C

D2Interpretive
21. The slope of the 9: curve will #e flatter the $$$$$$$$$$$$$$$$$$ is the income<sensitivity of the demand for money and the $$$$$$$$$$$$$$$$$$ is the interest<sensitivity of the demand for money A) less& less B) less& !reater C) !reater& less D) !reater& !reater Answer: B

D2Interpretive
22. >hich of the followin! will cause the 9: curve to shift to the ri!ht@ A) An increase in investment B) An increase in money demand C) A decrease in velocity D) An increase in the money supply Answer: D

D2Interpretive
2'. >hich of the followin! will cause the 9: curve to shift to the left@ A) A decrease in investment B) A decrease in money demand C) An increase in velocity D) A decrease in the money supply Answer: D

D2Interpretive
2.. An increase in money demand will shift the A) *2 curve to the left. B) *2 curve to the ri!ht. C) 9: curve to the left. D) 9: curve to the ri!ht. Answer: C

390itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D2Interpretive
2-. A decrease in money demand will shift the A) *2 curve to the left. B) *2 curve to the ri!ht. C) 9: curve to the left. D) 9: curve to the ri!ht. Answer: D

D2Interpretive
25. The *2 curve has a positive slope #ecause aBn) $$$$$$$$$$$$$$$$$$ in the interest rate leads to aBn) $$$$$$$$$$$$$$$$$$ in desired investment and this leads to an increase in 6D7 A) increase& increase B) increase& decrease C) decrease& increase D) decrease& decrease Answer: C

D2Interpretive
28. The *2 curve has a positive slope #ecause aBn) $$$$$$$$$$$$$$$$$$ in the interest rate leads to aBn) $$$$$$$$$$$$$$$$$$ in desired investment and this leads to a decrease in 6D7 A) increase& increase B) increase& decrease C) decrease& increase D) decrease& decrease Answer: B

D2Interpretive
2/. *n the *2 curve% at $$$$$$$$$$$$$$$$$$ income levels% savin! is $$$$$$$$$$$$$$$$$$% so the interest rate must #e $$$$$$$$$$$$$$$$$$ to e;pand investment. A) hi!her& smaller& lower B) hi!her& lar!er& hi!her C) hi!her& lar!er& lower D) lower& lar!er& lower Answer: C

D1Factual
2=. >hich of the followin! is an e+uili#rium condition for the !oods market@ A) :C ( 7D B) Desired e;penditure ( total production C) :oney demand ( money supply D) *2 ( 9: Answer: B

Chapter 2.The ISLM >orld40

D1Factual
'). >hich of the followin! is an e+uili#rium condition for the !oods market@ A) : ( k7D B) Desired savin! and desired investment C) :oney demand ( money supply D) *2 ( 9: Answer: B

D1Factual
'1. The *2 curve shows a series of e+uili#rium points in the !oods market for various levels of A) investment and interest rates. B) investment and money supply. C) income and interest rates. D) inflation and unemployment. Answer: C

D2Interpretive
'2. An increase in the interest rate causes A) movement up the *2 curve. B) movement down the 9: curve. C) the *2 curve to shift to the left. D) the 9: curve to shift to the ri!ht. Answer: A

D2Interpretive
''. A decrease in the interest rate causes A) movement up the *2 curve. B) movement down the 9: curve. C) the *2 curve to shift to the left. D) the 9: curve to shift to the ri!ht. Answer: B

D3Interpretive
'.. The slope of the *2 curve will #e flatter the $$$$$$$$$$$$$$$$$$ is the sensitivity of investment to a unit chan!e in the interest rate and the $$$$$$$$$$$$$$$$$$ is mar!inal propensity to save A) !reater& lar!er B) !reater& smaller C) less& lar!er D) less& smaller Answer: B

410itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D3Interpretive
'-. The slope of the *2 curve will #e steeper the $$$$$$$$$$$$$$$$$$ is the sensitivity of investment to a unit chan!e in the interest rate and the $$$$$$$$$$$$$$$$$$ is mar!inal propensity to save A) !reater& lar!er B) !reater& smaller C) less& lar!er D) less& smaller Answer: C

D2Interpretive
'5. The slope of the *2 curve is influenced #y the A) speculative demand for money. B) transactions demand for money. C) velocity of money. D) mar!inal propensity to consume. Answer: D

D2Interpretive
'8. The !reater the mar!inal propensity to consume% the A) flatter the *2 curve will #e. B) steeper the *2 curve will #e. C) flatter the 9: curve will #e. D) steeper the 9: curve will #e. Answer: A

D2Interpretive
'/. The smaller the mar!inal propensity to consume% the A) flatter the *2 curve will #e. B) steeper the *2 curve will #e. C) flatter the 9: curve will #e. D) steeper the 9: curve will #e. Answer: B

D2Interpretive
'=. Alon! an *2 curve as interest rates $$$$$$$$$$$$$$$$$$% income must #e $$$$$$$$$$$$$$$$$$ so that savin!% which is a positive function of income% can #e lower to e+ual the smaller level of investment. A) decline& lower B) decline& hi!her C) increase& lower D) increase& hi!her Answer: A

Chapter 2.The ISLM >orld42

D2Interpretive
.). Alon! an *2 curve as interest rates $$$$$$$$$$$$$$$$$$% income must #e $$$$$$$$$$$$$$$$$$ so that savin!% which is a positive function of income% can #e hi!her to e+ual the hi!her level of investment. A) decline& lower B) decline& hi!her C) increase& lower D) increase& hi!her Answer: D

D2Interpretive
.1. Alon! an *2 curve as income levels $$$$$$$$$$$$$$$$$$% savin! is lar!er% so the interest rate must #e $$$$$$$$$$$$$$$$$$ to e;pand the level of investment so it will #e e+ual to savin!. A) increase& hi!her B) increase& lower C) decrease& hi!her D) decrease& lower Answer: B

D2Interpretive
.2. Alon! an *2 curve as income levels $$$$$$$$$$$$$$$$$$% savin! is smaller% so the interest rate must #e $$$$$$$$$$$$$$$$$$ to reduce the level of investment so it will #e e+ual to savin!. A) increase& hi!her B) increase& lower C) decrease& hi!her D) decrease& lower Answer: C

D1Factual
.'. Any increase in autonomous spendin! will A) shift the *2 curve to the left. B) shift the *2 curve to the ri!ht. C) cause a movement down alon! an *2 curve. D) cause a movement up alon! an *2 curve. Answer: B

D1Factual
... Any decrease in autonomous spendin! will A) shift the *2 curve to the left. B) shift the *2 curve to the ri!ht. C) cause a movement down alon! an *2 curve. D) cause a movement up alon! an *2 curve. Answer: A

430itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D2Interpretive
.-. >hich of the followin! will chan!e the position of the *2 curve@ A) An increase planned investment spendin! B) An increase in interest rates C) An increase in money demand D) An increase in the money supply Answer: A

D2Interpretive
.5. An increase in !overnment spendin! will cause the A) 9: curve to shift to the ri!ht. B) 9: curve to shift to the left. C) *2 curve to shift to the ri!ht. D) *2 curve to shift to the left. Answer: C

D2Applied
.8. *f companies decrease investment spendin! #ecause of lower e;pected returns on proEects% forecasters should anticipate Beverythin! else the same) that A) 6D7 will rise. B) the money supply will fall. C) interest rates will fall. D) savin! will increase. Answer: C

D1Factual
./. >hich of the followin! is an e+uili#rium condition in the *29: model@ A) 9a#or demand ( la#or supply B) Desired investment ( desired savin! C) 6overnment spendin! ( ta;ation D) :oney supply ( income Answer: B

D1Factual
.=. >hich of the followin! is an e+uili#rium condition in the *29: model@ A) 9a#or demand ( la#or supply B) Actual savin! ( desired savin! C) 6overnment spendin! ( ta;ation D) :oney supply ( money demand Answer: D

D2Interpretive
-). 2tartin! from e+uili#rium and usin! the *29: framework% a decrease in investment leads to A) lower interest rates and hi!her income. B) hi!her interest rates and hi!her income. C) lower interest rates and lower income. D) hi!her interest rates and lower income. Answer: C

Chapter 2.The ISLM >orld44

D2Interpretive
-1. 2tartin! from e+uili#rium and usin! the *29: framework% an increase in investment leads to A) lower interest rates and hi!her income. B) hi!her interest rates and hi!her income. C) lower interest rates and lower income. D) hi!her interest rates and lower income. Answer: B

D3Interpretive
-2. 2tartin! from e+uili#rium in the *29: framework% a decrease in money demand results in A) a rise in income and the interest rate. B) a rise in income and a decline in the interest rate. C) a decline in income and the interest rate. D) a decline in income and a rise in the interest rate. Answer: B

D3Interpretive
-'. 2tartin! from e+uili#rium in the *29: framework% an increase in money demand results in A) a rise in income and the interest rate. B) a rise in income and a decline in the interest rate. C) a decline in income and the interest rate. D) a decline in income and a rise in the interest rate. Answer: D

D3Interpretive
-.. *n the *29: framework% monetary policy has the !reatest impact on e+uili#rium income when A) money demand ( money supply. B) money demand is infinitely elastic. C) the interest rate is low. D) the investment function is hi!hly interest<sensitive. Answer: D

D2Interpretive
--. 3nder the Classical assumptions% an increase in !overnment spendin! causes A) income to rise. B) income to fall. C) interest rates to rise. D) interest rates to fall. Answer: C

D3Interpretive
-5. *n the *29: framework% monetary policy has the !reatest impact on e+uili#rium income A) when money demand ( money supply. B) when money supply is infinitely elastic. C) when the interest rate is hi!h. D) the less is the interest<sensitivity of money demand. Answer: D

450itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D3Interpretive
-8. *n the *29: framework% the impact of monetary policy on e+uili#rium income is less when A) money demand ( money supply. B) money demand is infinitely elastic. C) the interest rate is low. D) the investment function has lower interest<sensitivity. Answer: D

D3Interpretive
-/. *n the *29: framework% monetary policy has the !reatest impact on e+uili#rium income A) when desired savin! ( desired savin!. B) when money supply is infinitely elastic. C) the !reater is the interest<sensitivity of money demand. D) when the interest rate is risin!. Answer: D

D2Interpretive
-=. Crowdin! out occurs when A) investment increases as !overnment spendin! falls. B) investment increases when !overnment spendin! rises. C) investment decreases when !overnment spendin! falls. D) investment decreases when !overnment spendin! rises. Answer: D

D2Factual
5). Complete crowdin! out occurs when the A) *2 curve is hori"ontal. B) *2 curve is vertical. C) 9: curve is hori"ontal. D) 9: curve is vertical. Answer: D

D2Factual
51. Crowdin! out would not occur if the A) *2 curve is hori"ontal. B) *2 curve is vertical. C) 9: curve is hori"ontal. D) 9: curve is vertical Answer: C

D1Factual
52. The steeper the 9: curve A) the more effective is monetary policy. B) the less effective is monetary policy. C) the !reater is the interest<sensitivity of investment. D) the !reater is the interest<sensitivity of the money supply. Answer: A

Chapter 2.The ISLM >orld46

D1Factual
5'. The flatter is the 9: curve A) the more effective is fiscal policy. B) the less effective is fiscal policy. C) the less is the interest sensitivity of savin!. D) the less is the interest sensitivity of the money supply. Answer: A

D2Applied
5.. Assume that you are a policy adviser who #elieves that money demand is hi!hly interest<sensitive #ut investment is not. Asked your advice on how to pull the economy out of a recession% you are likely to emphasi"e A) contractionary monetary policy. B) e;pansionary monetary policy. C) contractionary fiscal policy. D) e;pansionary fiscal policy. Answer: D

D2Interpretive
5-. *f the velocity of money is completely insensitive to chan!es in the rate of interest% the A) 9: curve will #e hori"ontal. B) 9: curve will #e vertical. C) *2 curve will #e hori"ontal. D) *2 curve will #e vertical. Answer: B

D2Interpretive
55. :onetary policy will #e most effective when A) the *2 curve is flat and the 9: curve is flat. B) the *2 curve is steep and the 9: curve is flat. C) the *2 curve is flat and the 9: curve is steep. D) the *2 curve is steep and the 9: curve is steep. Answer: C

D2Interpretive
58. ?iscal policy is most effective when A) * is very sensitive to r. B) 97 is not very sensitive to r. C) 97 is very sensitive to r. D) * is not very sensitive to r. Answer: C

470itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D3Factual
5/. >hich of the followin! is false@ Critics of the *29: framework have stated that A) there is no linka!e #etween flow and stock concepts. B) the interest rate is the only mechanism throu!h which monetary policy operates. C) money is not a su#stitute for physical assets. D) velocity is assumed to #e constant. Answer: D

D2Interpretive
5=. *n the *29: framework% a declinin! price level causes A) interest rates to rise. B) income to fall. C) savin! to rise. D) the 9: curve to shift to the ri!ht. Answer: D

D2Interpretive
8). *n the *29: framework% a risin! price level causes A) the e+uili#rium interest rate to rise. B) the e+uili#rium level of income to fall. C) desired savin! to rise. D) the 9: curve to shift to the ri!ht. Answer: A

D2Interpretive
81. >hen the economy is in the li+uidity trap% A) velocity is constant. B) monetary policy is impotent. C) fiscal policy is impotent. D) income is "ero Answer: B

D2Interpretive
82. >hen the 9: curve is hori"ontal% A) fiscal policy has no impact on e+uili#rium income. B) fiscal policy has no impact on the e+uili#rium interest rate. C) the economy is at full employment. D) monetary policy has no impact on e+uili#rium income. Answer: D

D2Interpretive
8'. >hen the 9: curve is vertical% A) fiscal policy has no impact on e+uili#rium income. B) fiscal policy has no impact on the e+uili#rium interest rate. C) the economy is at full employment. D) monetary policy has no impact on e+uili#rium income. Answer: A

Chapter 2.The ISLM >orld48

D1Factual
8.. The *29: model can #e used to derive A) a!!re!ate demand. B) a!!re!ate supply. C) the money multiplier. D) the lon!<run economic !rowth rate. Answer: A

D1Factual
8-. A risin! 6D7 causes $$$$$$$$$$$$$$$$$$ the money demand curve. A) downward movement alon! B) upward movement alon! C) a ri!htward shift of D) a leftward shift of Answer: C

D1Factual
85. A fallin! 6D7 causes $$$$$$$$$$$$$$$$$$ the money demand curve. A) downward movement alon! B) upward movement alon! C) a ri!htward shift of D) a leftward shift of Answer: D

D2Interpretive
88. At any point a#ove the current 9: curve% there is an A) e;cess demand for money. B) e;cess supply of money. C) e;cess demand for !oods. D) e;cess supply of !oods. Answer: B

D2Interpretive
8/. At any point #elow the current 9: curve there is an A) e;cess demand for money. B) e;cess supply of money. C) e;cess demand for !oods. D) e;cess supply of !oods. Answer: A

D2Applied
8=. 2uppose k ( ).2. >ith a ,2)) #illion increase in the money supply% the 9: curve shifts A) to the ri!ht #y ,.) #illion. B) to the left #y ,15) #illion. C) to the left #y ,2)) #illion. D) to the ri!ht #y ,1))) #illion. Answer: D

490itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D3Interpretive
/). 2uppose k ( ).2-. >ith a ,1) #illion decrease in the money supply% the 9: curve shifts A) to the left #y ,.) #illion. B) to the left #y ,. #illion. C) to the left #y ,2.- #illion. D) to the ri!ht #y ,).2- #illion. Answer: A

D3Interpretive
/1. The 9: curve #ecomes steeper if there is $$$$$$$$$$$$$$$$$$ in the interest<sensitivity of $$$$$$$$$$$$$$$$$$ demand. A) an increase& money B) an increase& investment C) a decrease& money D) a decrease& investment Answer: C

D3Interpretive
/2. The *2 curve #ecomes steeper if there is $$$$$$$$$$$$$$$$$$ in the interest<sensitivity of $$$$$$$$$$$$$$$$$$ demand. A) an increase& money B) an increase& investment C) a decrease& money D) a decrease& investment Answer: D

D2Interpretive
/'. At any point a#ove the current *2 curve% there is an A) e;cess demand for !oods. B) e;cess supply of !oods. C) e;cess demand for money. D) e;cess supply of money. Answer: B

D2Interpretive
/.. At any point #elow the current *2 curve% there is an A) e;cess demand for !oods. B) e;cess supply of !oods. C) e;cess demand for money. D) e;cess supply of money. Answer: A

Chapter 2.The ISLM >orld50

D2Applied
/-. 2uppose the mar!inal propensity to consume is )./. A ,2) #illion increase in !overnment spendin! shifts the *2 curve A) to the ri!ht #y ,1)) #illion. B) to the left #y ,2) #illion. C) to the left #y ,15 #illion. D) to the ri!ht #y ,2.- #illion. Answer: A

D2Applied
/5. 2uppose the mar!inal propensity to consume is ).8-. A ,1-) #illion increase in !overnment spendin! shifts the *2 curve A) to the ri!ht #y ,-) #illion. B) to the left #y ,-) #illion. C) to the left #y ,5)) #illion. D) to the ri!ht #y ,5)) #illion. Answer: D

D2Interpretive
/8. ?rom an *2<9: e+uili#rium point% a rise in !overnment spendin! #rin!s a#out a new e+uili#rium point with $$$$$$$$$$$$$$$$$$ income and a $$$$$$$$$$$$$$$$$$ interest rate. A) hi!her& hi!her B) hi!her& lower C) lower& hi!her D) lower& lower Answer: A

D2Interpretive
//. ?rom an *2<9: e+uili#rium point% a drop in !overnment spendin! #rin!s a#out a new e+uili#rium point with $$$$$$$$$$$$$$$$$$ income and a $$$$$$$$$$$$$$$$$$ interest rate. A) hi!her& hi!her B) hi!her& lower C) lower& hi!her D) lower& lower Answer: D

D3Interpretive
/=. 9ess interest<sensitivity of investment% makin! the *2 curve $$$$$$$$$$$$$$$$$$% will also make monetary policy $$$$$$$$$$$$$$$$$$ effective in chan!in! the 6D7. A) steeper& more B) steeper& less C) flatter& more D) flatter& less Answer: B

510itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D3Interpretive
=). 6reater interest<sensitivity of investment% makin! the *2 curve $$$$$$$$$$$$$$$$$$% will make monetary policy $$$$$$$$$$$$$$$$$$ effective in chan!in! the 6D7. A) steeper& more B) steeper& less C) flatter& more D) flatter& less Answer: C

D3Interpretive
=1. Crowdin!<out is more complete with a $$$$$$$$$$$$$$$$$$ 9: curve% perhaps due to a lower $$$$$$$$$$$$$$$$$$<sensitivity of money demand. A) flatter& income B) flatter& interest<rate C) steeper& income D) steeper& interest<rate Answer: D

D3Interpretive
=2. Crowdin! out is less of a pro#lem when the interest<rate sensitivity of investment demand is $$$$$$$$$$$$$$$$$$% leadin! to a relatively $$$$$$$$$$$$$$$$$$ *2 curve. A) low& steep B) low& flat C) hi!h& steep D) hi!h& flat Answer: B

D3Interpretive
='. Crowdin! out is more of a pro#lem when the interest<rate sensitivity of investment is $$$$$$$$$$$$$$$$$$% leadin! to a relatively $$$$$$$$$$$$$$$$$$ *2 curve. A) low& steep B) low& flat C) hi!h& steep D) hi!h& flat Answer: C

D1Factual
=.. *n *2<9: analysis% the nominal interest rate is A) purely a monetary phenomenon. B) purely a real phenomenon. C) #oth a monetary and a real phenomenon. D) neither a real nor a monetary phenomenon% #ut determined #y !overnment policy. Answer: C

Chapter 2.The ISLM >orld52

D2Factual
=-. FThe price level may fall #ut it will not necessarily lower the interest rate% not if we are in a li+uidity trap.G This is a statement a $$$$$$$$$$$$$$$$$$ economist mi!ht make as an e;planation of why the economy $$$$$$$$$$$$$$$$$$ pull out of a recession. A) Classical& will B) Classical& may not #e a#le to C) eynesian& will D) eynesian& may not #e a#le to Answer: D

D2Factual
=5. FA lower price level may lower the interest rate% #ut investment demand may not respond to this.G This is a statement a $$$$$$$$$$$$$$$$$$ economist mi!ht make as an e;planation of why the economy $$$$$$$$$$$$$$$$$$ pull out of a recession. A) Classical& will B) Classical& may not #e a#le to C) eynesian& will D) eynesian& may not #e a#le to Answer: D

D2Factual
=8. F4ven if there is a li+uidity trap or interest<insensitive investment% a fallin! price level will increase the real money supply and real wealth% and this impacts consumption.G This is a statement a $$$$$$$$$$$$$$$$$$ economist mi!ht make as an e;planation of why the economy $$$$$$$$$$$$$$$$$$ pull itself out of a recession. A) Classical& will B) Classical& may not #e a#le to C) eynesian& will D) eynesian& may not #e a#le to Answer: A.

D2Interpretive
=/. >ith a rise in !overnment e;penditure we A) move up alon! an a!!re!ate demand curve. B) move down alon! an a!!re!ate demand curve. C) shift the a!!re!ate demand curve to the ri!ht. D) shift the a!!re!ate demand curve to the left. Answer: C

D2Interpretive
==. >ith a decrease in !overnment e;penditure we A) move up alon! the a!!re!ate demand curve. B) move down alon! the a!!re!ate demand curve. C) shift the a!!re!ate demand curve to the ri!ht. D) shift the a!!re!ate demand curve to the left. Answer: D

530itter12il#er13dell Money, Banking, and Financial Markets % 4leventh 4dition

D2Factual
1)). A hi!her price level causes us to A) move up alon! an a!!re!ate demand curve. B) move down alon! an a!!re!ate demand curve. C) shift the a!!re!ate demand curve to the ri!ht. D) shift the a!!re!ate demand curve to the left. Answer: A

D2Interpretive
1)1. A lower price level causes us to A) move up alon! the a!!re!ate demand curve. B) move down alon! the a!!re!ate demand curve. C) shift the a!!re!ate demand curve to the ri!ht. D) shift the a!!re!ate demand curve to the left. Answer: B