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Multiple Choice Quiz
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1
In its conduct of monetary policy, the Fed focuses on setting interest rate targets since changes in the interest rate affect economic activity mostly through
A)the cost of borrowing and thus the level of spending on investment and durable consumption
B)the value of government bonds and thus people's wealth
C)the return on private saving and thus people's financial investments
D)the demand for money and thus peoples' spending behavior
2
The goods market and the money market are linked together by
A)monetary policy
B)fiscal policy
C)interest rates
D)the labor market
3
The equation: i = (1/b)Ao – (b/α)Y best describes
A)the IS-curve
B)the LM-curve
C)the AD-curve
D)none of the above
4
Which of these policy measures will make the IS-curve steeper and shift it to the left?
A)a decrease in money supply
B)a decrease in government transfer payments
C)a decrease in lump sum taxes
D)a decrease in the income tax rate
5
Any position that is to the left of (and above) the LM-curve indicates that there is
A)excess demand for goods and services
B)excess supply of goods and services
C)excess demand for money
D)excess supply of money
6
The LM-curve becomes flatter if
A)money demand becomes less sensitive to changes in the interest rate
B)money demand becomes less sensitive to changes in income
C)money demand becomes more sensitive to changes in income
D)the monetary policy multiplier becomes larger
7
In an IS-LM framework, an increase in autonomous saving will result in
A)a decrease in income but an increase in the interest rate
B)a decrease in both income and the interest rate
C)an increase in both income and the interest rate
D)an increase in income but a decrease interest rates
8
In an IS-LM framework, expansionary monetary policy will
A)increase both income and the interest rate
B)increase saving and decrease consumption
C)increase both consumption and investment
D)increase the size of the budget deficit
9
A movement along the AD-curve from left to right is equivalent to
A)a shift of the IS-curve to the right due to a decrease in interest rates
B)a shift of the LM-curve to the right due to an increase in real money balances
C)a shift of the LM-curve to the right due to an increase in nominal money supply
D)a movement along the LM-curve from left to right due to lower real money balances
10
The AD-curve will shift to the right if
A)government transfer payments are increased
B)real money balances increase due to a decrease in the price level
C)autonomous saving increases
D)the central bank restricts nominal money supply





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