Macroeconomics Quiz on IS-LM Model and Real Interest Rate

Macroeconomics Review

• A decrease in the expected real interest rate occurs when the nominal interest rate is 8% and the expected inflation is 3%, resulting in a 5% expected real interest rate.
• Risk premiums on corporate bonds tend to decrease during business cycle expansions and increase during recessions.
• Checkable deposits are reported as liabilities on a bank's balance sheet.
• The labor force is defined as the sum of the employed and the unemployed.
• The variable z in the wage setting relation W = PeF(u,z) does not include the extent to which firms mark up prices over their marginal cost.
• In the price setting equation P = (1 + m)W, m equals 0 when there is perfect competition.
• The natural level of employment (N) will increase when consumption, disposable income, or saving increases.
• In the consumption function C = c0 + c1YD, c1 is assumed to be none of the above (negative, larger than c0, different at different levels of income).
• The marginal propensity to save is 0.25 in the consumption equation C = 250 + 0.75YD.
• The multiplier for the economy is 5 in the consumption equation C = 250 + 0.8YD.
• An increase in autonomous consumption will cause an increase in equilibrium income, equilibrium disposable income, and demand.

Economic Equilibrium

• In a closed economy, I = S + (T - G) is true when the economy is in equilibrium.
• A decrease in business confidence will cause a reduction in investment, leading to a reduction in the multiplier.
• A reduction in government spending will cause a reduction in output and have no effect on the interest rate.

LM Curve

• The LM curve illustrates the level of output where money supply equals money demand for each interest rate.
• An increase in the money supply will cause an increase in output, investment, and consumption.

Fiscal Policy

• A fiscal contraction will cause a decrease in consumption, investment, and output.
• An increase in consumer confidence will cause a rightward shift in the IS curve.

Monetary Policy

• A Fed purchase of securities will most likely have an expansionary effect on the economy.