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© 2014 Pearson Canada Inc.#
Which of the following statements concerning Keynesian ISLM analysis is true?
A) For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.
B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve.
C) A fall in the money supply shifts the LM curve to the right.
D) Expansionary fiscal policy will cause the interest rate to fall.
Answer: A
Diff: 2 Type: MC Page Ref: 8 - 9
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model
Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government
stimulus was overwhelmed by the continuing deterioration in credit market conditions.
Everything else held constant and using the ISLM model, the net effect would cause the
____ curve to ____ and output will ____.
A) IS; shift left; decrease
B) IS; shift right; increase
C) LM; shift right; increase
D) LM; shift left; decrease
Answer: A
Diff: 2 Type: MC Page Ref: 9
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model
Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal
contraction. How do the equilibrium level of output and interest rate change?
Answer: The monetary expansion shifts the LM curve to the right which by itself would cause
the interest rate to decrease and aggregate output to increase. The fiscal contraction shifts the IS
curve to the left which by itself would cause the interest rate to decrease and aggregate output to
decrease. Therefore, the equilibrium interest rate unambiguously falls, while the effect on output
is indeterminate.
Diff: 2 Type: SA Page Ref: 7 - 9
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model