ISLM: Sample Quiz

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1. When the central bank sells government bonds on the open market we have:

contractionary monetary policy.
 expansionary monetary policy.
 contractionary fiscal policy.
 expansionary fiscal policy.
 none of the above.

2. Tax cuts designed to encourage investment are:

contractionary monetary policy.
 expansionary monetary policy.
 contractionary fiscal policy.
 expansionary fiscal policy
 none of the above.

3. If the Congress passes wage and price controls in response to increased inflation we have had:

contractionary monetary policy.
 expansionary monetary policy.
 contractionary fiscal policy.
 expansionary fiscal policy.
 none of the above.

4. An increase in social security payments would work as:

contractionary monetary policy.
 expansionary monetary policy.
 contractionary fiscal policy.
 expansionary fiscal policy.
 none of the above.

5. Suppose the government increases spending. Which of the following would be part of the crowding out effect?

Interest rates rise and investment falls.
 Interest rates rise and velocity of circulation rises.
 Higher interest rates encourage the Fed to increase money supply.
 Interest rates fall and exports rise.

6. John Doe thinks he is better off now than he was a year ago because his income has gone up by 20%. However, in the past year prices have also gone up by 20%. Economists say that John:

suffers from money illusion.
 is unable to determine his permanent income.
 has a high reservation wage.
 has a mpc of one.

7. The IS curve shows all combinations of income and:

interest rate for which the goods market is in equilibrium.
 interest rate for which the money market is in equilibrium.
 price level for which the goods market is in equilibrium.
 price level for which the money market is in equilibrium.

8. In terms of the ISLM model, an increase in tax rates should move the:

IS curve left.
 IS curve right.
 LM curve right.
 LM curve left.

9. Suppose that the government decides to spend more. The ISLM model suggests that the effects of this action on total spending will be greatest if it is financed by:

money creation and smallest if financed by borrowing.
 taxation and smallest if financed by borrowing.
 borrowing and smallest if financed by taxation.
 borrowing and smallest if financed by money creation.
money creation and smallest if financed by taxation.

10. In deriving aggregate demand and aggregate supply curves, economists argue that aggregate supply:

comes from the IS-LM model.
 comes from adding up all the individual supply curves in the economy.
 shows how total production responds to changes in price level.
 reflects the actions of both fiscal and monetary policy makers.

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