Econ 102: Developing the IS-LM Model Quiz

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18 Questions

In the IS-LM model, what does the LM curve represent?

Equilibrium in the money market

Why is the LM curve upward sloping according to the text?

An increase in income raises money demand

What does the equation M/P = L(r, Y) represent in the context of the economy?

Money demand as a function of interest rates and income

How does an increase in income impact the LM curve?

Shifts the LM curve to the right

What is the role of interest rates in restoring equilibrium in the money market?

Interest rates must rise to restore equilibrium in the money market

How is equilibrium defined in the IS-LM model?

Equilibrium in the goods market and money market

What characterizes the short run in the IS-LM model?

Sticky prices and demand affecting supply

Which component is part of planned expenditure in the Keynesian Cross model?

Government spending

Why does an increase in taxes lead to a reduction in income in the short run?

It decreases consumption and planned expenditure

What happens to output and income when firms face an unplanned inventory buildup?

Output decreases and income falls

What does the tax multiplier indicate when it comes to fiscal policy?

Tax increases reduce consumption and income

How does the IS-LM model determine income and interest rates in the short run?

By keeping prices fixed and analyzing the impact of changes in fiscal and monetary policy

What motivates firms to increase investment spending in the IS-LM model?

A fall in the interest rate

In the IS-LM model, what is the consequence of a fall in the interest rate on total planned spending (PE)?

PE increases

How does a fall in the interest rate affect the equilibrium output (Y) in the goods market according to the IS-LM model?

Output increases

What does the IS curve represent in the IS-LM model?

Relationship between interest rate and output

Which curve helps us understand the relationship between interest rate and income through the good markets in the IS-LM model?

LM curve

What is needed to accurately determine both interest rate and income in the IS-LM model?

Multiple equations

Test your knowledge on developing the IS-LM model, understanding the difference between the long run and short run, and how the Keynesian cross incorporates mathematical models in economics.

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