IS-LM Model Overview

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Questions and Answers

Match the points with their corresponding descriptions:

Point A = Equilibrium in the money market Demand for money = Increases with higher output Increase in interest rate = Leads to a fall in demand for money Money supply increase = Results in demand for money being smaller than supply

Match the economic concepts with their definitions:

LM curve = Represents the relationship between interest rates and money supply Output increase = Leads to higher demand for money Central bank influence = Determines the exogenous supply of money Bonds = Assets that pay an interest rate and are issued by government

Match the outcomes with their triggers:

Demand for money falls = When interest rates increase Equilibrium is disrupted = When money supply is expanded Demand for bonds = Decreases as bond prices rise Utilities of money = Comes from the services it provides

Match the economic variables with their effects:

Income increase = Larger cash demand Interest rate decrease = Could restore equilibrium Money supply expansion = Creates excess supply of money Decreasing demand for bonds = Occurs as the price of bonds increases Signup and view all the answers

Match the statements with their implications:

Non-equilibrium at Point A = Demand for money is less than supply Increasing output is necessary = To restore demand for money Interest rate influence = Can adjust money demand Portfolio allocation = Divides wealth between money and bonds Signup and view all the answers

Match the scenarios with their respective outcomes:

When output increases = Demand for money rises When central bank raises money supply = Demand for money may fall below supply When interest rates rise = Demand for money decreases When utility from money is increased = Alienates interest rate impacts Signup and view all the answers

Match the factors with their roles in the economy:

Central bank = Sets the exogenous supply of money Output levels = Influences demand for cash Interest rates = Impact demand for money Bonds pricing = Affects bond demand inversely Signup and view all the answers

Match the economic principles with their applications:

Demand for money = Higher when facing increasing income LM curve = Increases with both interest rate decline and output increase Interest rate reduction = Stimulates demand for money Cash requirements = Rise with higher consumer wealth Signup and view all the answers

Match the monetary policy actions with their expected economic effects:

Expansionary Monetary Policy = Reduces interest rates and increases output Expansionary Fiscal Policy = Increases interest rates and output Decrease in Marginal Propensity to Save = Increases interest rates and output Drop in Consumer Confidence = Increases private savings Signup and view all the answers

Match the variables with their characteristics in the context of the model:

Money Supply = Remains unchanged with a drop in consumer confidence Money Demand = Remains identical at the original interest rate Investment = Depends on interest rates and business sentiment Savings = Increases with a drop in consumer confidence Signup and view all the answers

Match the shocks with their implications for the economy:

Drop in Consumer Confidence = Impacts savings but not investment Increase in Expenditures = Increases interest rates and output Tax-Cut = Increases interest rates and output Increase in Money Supply = Reduces interest rates Signup and view all the answers

Match the economic markets with their respective equilibria conditions:

Goods Market = Equilibrium is affected by fiscal policy Money Market = Equilibrium is affected by monetary policy Private Savings = Increases with lower consumer confidence Investment Dynamics = Is influenced by interest rates Signup and view all the answers

Match the conditions of the economy with their outcomes:

Initial Interest Rate and Output = Equilibrium remains unchanged with certain shocks Fiscal Policy Increase = Shifts output and interest rate upwards Consumer Confidence Drop = Leads to greater private savings Interest Rate Constancy = Investment remains unaffected Signup and view all the answers

Match the following effects with the respective scenario:

Expansionary Monetary Policy = Increases output in the short run Shock with No Impact = Equilibrium stays at original interest and output levels Investment Constancy = Assumed unchanged due to stable interest rates Private Savings Growth = Triggered by a drop in consumer confidence Signup and view all the answers

Match the expected results of economic policies with their descriptions:

Decrease in Marginal Propensity to Save = Increases interest rates in the economy Expansionary Fiscal Policy = Shifts the interest rate upwards Increase in Investment = Not affected when interest rates are stable Increase in Consumer Confidence = Potentially reduces private savings Signup and view all the answers

Match the changes in economic conditions with their respective outcomes:

Drop in Consumer Confidence = Increases private savings Increase in Taxation = Raises interest rates and output Increase in Money Supply = Lowers interest rates Stable Interest Rates = Keeps investment levels constant Signup and view all the answers

Match the following terms with their definitions:

Equilibrium Price = The price at which the quantity of bonds demanded equals the quantity supplied Expansionary Monetary Policy = Increase in money supply leading to lower interest rates Supply of Bonds = Fixed amount of government bonds available in the market Central Bank = The institution that manages a country's currency and monetary policy Signup and view all the answers

Match the following effects of bond supply with their outcomes:

Increase in Bond Supply = Equilibrium price falls, interest rate rises Decrease in Bond Supply = Equilibrium price rises, interest rate falls Increase in Demand for Bonds = Equilibrium price rises, interest rate falls Central Bank Buys Bonds = Consumers' cash holdings increase, bond holdings decrease Signup and view all the answers

Match the monetary policy descriptions with their types:

Market-determined price = Central bank sets quantity of bonds Interest rate target = Central bank sets the price at which it buys or sells bonds Exchange rate control = Policy targeting currency value against another currency Money supply control = Central bank influences money available in the economy Signup and view all the answers

Match the following economic concepts with their significance:

IS-LM Model = Represents interaction between interest rates and real output Supply of Government Bonds = Influences equilibrium price and consumer investment Central Bank Operations = Regulates money supply by buying and selling bonds Consumers’ Wealth = Determines asset allocation between cash and bonds Signup and view all the answers

Match the following monetary instruments with their descriptions:

Bonds = Debt securities issued by governments to borrow money Cash = Currency available in the hands of the consumers Interest Rate = The return on investment given for holding bonds Central Bank Reserves = Assets held by the central bank to manage monetary policy Signup and view all the answers

Match the bond market scenarios with their implications:

Consumers hold more cash = Decreased demand for bonds Central bank increases money supply = Interest rates decrease Bond prices increase = The implicit yield on bonds decreases Supply of bonds decreases = Equilibrium price increases Signup and view all the answers

Match the following outcomes with their corresponding monetary actions:

Buying Bonds = Increases cash supply for consumers Selling Bonds = Decreases cash supply for consumers Lowering Interest Rates = Stimulates investment in bonds Increasing Bond Prices = Reduces the return on newly issued bonds Signup and view all the answers

Match the terms related to bond markets with their meanings:

Implicit Yield = The effective return on bonds considering market conditions Bond Demand = The desire to purchase bonds at given prices Fixed Bond Supply = The limitation in quantity of bonds available for investment Market Price = The current rate at which bonds can be bought or sold Signup and view all the answers

Match the following economic terms with their definitions:

Consumer sentiment = The degree of confidence consumers have in the economy Investment = The allocation of resources to generate future benefits Interest rate = The cost of borrowing capital Equilibrium = A state where savings equal investment Signup and view all the answers

Match the following variables with their relationships:

Savings = Tends to increase when output rises Investment = Decreases as interest rates rise Business sentiment = Influences investment decisions Output = Affects the intersection of savings and investment Signup and view all the answers

Match the following components with their roles in the economy:

C = Represents consumer spending I = Denotes investment levels i = Refers to the interest rate 1-c = Indicates the marginal propensity to save Signup and view all the answers

Match the concepts related to interest rates with their effects:

Decrease in interest rate = Increases investment Increase in output = Leads to higher savings Higher consumer confidence = Reduces savings rates Stable interest rate = Maintains current levels of investment Signup and view all the answers

Match the following economic phenomena with their corresponding curves:

Increasing output = Shifts the point of equilibrium Downward sloping curve = Represents the IS relationship Equal savings and investment = Found at equilibrium point A Investment adjustment = Occurs with changes in interest rates Signup and view all the answers

Match the economic terms with their effects on consumption and savings:

Elasticity of substitution = Assumes a constant level of consumer preference Business sentiment improvement = Encourages increased investment Reduction in consumption = Occurs when savings exceed investment Fiscal policy changes = Can influence (1-c) rates Signup and view all the answers

Match the following statements with their implications:

High consumer sentiment = Reduces the savings rate Low interest rates = Stimulates investment growth Increased savings = Leads to lower investment levels Equilibrium state = Maintains balance between savings and investment Signup and view all the answers

Match the following economic principles with their consequences:

Investment inversely proportional to interest rate = Higher rates reduce capital accumulation Changes in interest rate = Affect the level of investment Savings greater than investment = Indicates a shift in equilibrium Stability in investment = Requires consistent consumer confidence Signup and view all the answers

Match the following concepts with their descriptions:

IS Curve = Represents the relationship between interest rates and investment LM Curve = Represents money demand and supply equilibrium Portfolio Decision = Choice between holding cash or bonds Savings = Resources set aside after production and taxes Signup and view all the answers

Match the following effects of interest rates with their impacts:

Increase in interest rates = Leads to reduced investment Interest rates and savings = Assumed to be unaffected in this model Rise in output = Increases money demand Higher money supply = Leads to disequilibrium at point A Signup and view all the answers

Match the scenarios with their outcomes:

Increased money supply at point A = No impact on savings or investment Shift in LM to the right = Indicates increased money demand Cash versus bonds decision = Involves opportunity cost IS curve staying constant = Savings and investment remain the same Signup and view all the answers

Match the following economic principles with their characteristics:

Substitution effect = People switch from cash to bonds when rates rise Income effect = Overall buying power changes due to interest rates Disequilibrium = Occurs when money supply exceeds demand Equilibrium adjustment = Output goes up when moving right from point A Signup and view all the answers

Match the following economists' concerns with their topics:

Investment vs. savings = Highlighting their differences in economy Interest rates and output = Critical for assessing market conditions Macroeconomic intuitions = Understanding complex relationships Resources in bonds = Reflection of opportunity cost decisions Signup and view all the answers

Match the following models with their functions:

IS-LM Model = Describes interactions between the goods and money markets Liquidity preference = Focuses on the demand for money Equilibrium point = Where IS and LM curves intersect Market forces = Influence shifts in IS and LM schedules Signup and view all the answers

Match the following points with their characteristics in the IS-LM model:

Point A = Savings are larger than investment Point B = Savings equal investment Point C = Increased output due to higher interest rates Point D = Output and savings decrease, interest rates drop Signup and view all the answers

Match the following scenarios with their effects on the IS curve:

Moving to the right from Point A = Increases savings but keeps investment constant Moving to the left from Point A = Decreases output and savings Increase in consumer confidence = Shifts the IS curve to the right Decrease in consumer confidence = Shifts the IS curve to the left Signup and view all the answers

Match the following impacts of money supply changes to their outcomes:

Increase in money supply = May lead to lower interest rates Decrease in money supply = May lead to higher interest rates Higher interest rates = May decrease investment Lower interest rates = May increase consumer spending Signup and view all the answers

Match the following concepts with their implications in the economy:

Recession = Fall in output and consumer confidence Investment stagnation = Output remains constant but savings increase Interest rate parity = Maintains level of investment despite changes in output Savings surplus = Occurs when savings exceed investment in the economy Signup and view all the answers

Match the following economic conditions with their interactions:

High output = Increases savings while keeping investment constant Low output = Decreases savings and potentially lower interest rates Equilibrium at point A = Money supply equals money demand Shift in LM curve = Occurs with changes in money supply Signup and view all the answers

Match the following movements on the IS-LM model to their effects:

Upward movement in IS curve = Worsens the gap between savings and investment Downward movement in IS curve = Reduces the gap between savings and investment Horizontal movement in LM curve = Indicates constant interest rates while output changes Vertical movement in LM curve = Reflects changes in money supply affecting interest rates Signup and view all the answers

Match the following economic signals with their probable causes:

Rise in savings = Fall in consumer confidence Stagnant investment = Interest rates persisting at a low level Decrease in output = Same interest rates but reduced economic activity Increase in output = Same investment levels yet rising savings Signup and view all the answers

Flashcards

Consumer Sentiment

Consumer sentiment, or confidence, is a major economic indicator that directly influences spending habits.

Consumer Confidence and Savings

A higher consumer confidence level leads to less saving and more spending.

Investment and Interest Rates

Investment in the economy is generally inversely proportional to the interest rate, meaning higher interest rates discourage investment.