the economics of money, banking, and financial markets

904 #

© 2014 Pearson Canada Inc.#

21. 
    

    If the ____ curve is relatively more unstable than the ____ curve, an interest rate
    target is preferred.
    A) IS; IS
    B) IS; LM
    C) LM; IS
    D) LM; LM
    Answer: C
    Diff: 2 Type: MC Page Ref: 15
    Skill: Recall
    Objective List: WEB CHAPTER: The ISLM Model

    
    


22. 
    

    If the IS and LM curves in the economy are given by the curves in the following diagram,
    what would lead to the particular LM curve depicted? How would this affect fiscal and monetary
    policies?

    
    

Answer: The students must point that the LM curve in this diagram has the property of being
vertical to the output axis. This can be the case when money demand in the economy is
unaffected by the interest rate (it is interest-inelastic). In a special case like this fiscal policy is
completely ineffective in terms of affecting aggregate output while monetary policy is very
effective. This is the case of complete crowding out.
Diff: 3 Type: SA Page Ref: 12
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model

23. When is the targeting of the money supply preferred to the interest-rate target? support your
    answer with the appropriate diagram.
    Answer: The students must draw the diagram (Figure 8) of the textbook where they show
    diagramatically that a money supply target is preferred in terms of output fluctuation, when the
    IS curve is more unstable than the LM curve is.
    Diff: 3 Type: SA Page Ref: 14
    Skill: Recall
    Objective List: WEB CHAPTER: The ISLM Model