897 #
© 2014 Pearson Canada Inc.#- 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?
Answer: See figure below.
The monetary contraction shifts the LM curve to the left. The result is that the equilibrium level
of output falls and the equilibrium interest rate increases.
Diff: 2 Type: SA Page Ref: 7
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model
28.5 Effectiveness of Monetary Versus Fiscal Policy
The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is
referred to as ____.
A) fiscal neutrality
B) a recession
C) complete crowding out
D) inflation
Answer: C
Diff: 2 Type: MC Page Ref: 17
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model
If the quantity of money demanded is not affected by changes in the interest rate, the LM
curve is ____ and fiscal policy will be ____.
A) horizontal; very effective
B) horizontal; ineffective
C) vertical; ineffective
D) vertical; very effective
Answer: C
Diff: 2 Type: MC Page Ref: 12
Skill: Recall
Objective List: 28.3 Evaluate how fiscal and monetary policy variables are used in the IS-LM
model