Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Liquidity preference is the theory of how
a. | Equilibrium in the asset market determines the equilibrium nominal interest
rate. | b. | Households choose their demand for money. X | c. | Firms decide how
much corporate bonds to float on the market. | d. | The Fed chooses its money
supply. |
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2.
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If the demand for money is MD = (h/i)PY, and money supply is
MS, then the equation of the LM curve is
a. | MD = (h/i) MS. | c. | i = h
(P/MS)Y. | b. | Y = h
(MS/P)i. | d. | Y =
(MS/P) + h/i. |
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3.
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An increase in the interest elasticity of money demand will
a. | make the LM curve flatter. | c. | not affect the LM
curve. | b. | make the LM curve steeper. | d. | shift the LM curve parallel to the left. |
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4.
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If money supply increases by 10% and the price level increases by 8%, then the
LM curve
a. | shifts to the left. | b. | shifts to the right. | c. | is not
affected. | d. | is not affected if money demand is not sensitive to interest rate
changes. |
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5.
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If the LM curve is vertical at some GDP level Y0, then it is possible
to deduce that
a. | money demand depends positively on the interest rate. | b. | money demand does
not depend upon income Y. | c. | money demand does not depend upon the interest
rate. | d. | money supply is increasing in the interest rate. |
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6.
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The positive relationship of the saving curve with respect to the interest rate
results because
a. | high interest rates increase the future returns that households will obtain from
their savings. | b. | high interest rates increase the opportunity cost of consuming today, so that people
save more to smooth their consumption over time. | c. | low interest rates reduce the interest income
on current savings, forcing people to save more. | d. | a and b. |
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7.
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If the savings curve becomes more sensitive to changes in disposable income,
then the IS curve will
a. | become flatter. | c. | be perfectly interest rate elastic. | b. | become
steeper. | d. | not change its
slope or position. |
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8.
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8. Let the
equation of the investment curve be I = a - b(i - pe), where i is the nominal interest rate and pe the expected inflation rate. The constants a, b are
both positive. If investment becomes less interest elastic, this means that
a. | a increases. | c. | b increases. | b. | a decreases. | d. | b
decreases. |
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9.
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If the demand for money is interest rate inelastic, then
a. | the LM curve will be vertical. | c. | the LM curve will be
flatter. | b. | the LM curve will be horizontal. | d. | the IS curve will be
flatter. |
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10.
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An increase in the price level will
a. | not affect the slope or position of the LM curve. | b. | shift the LM curve
to the right. | c. | shift the LM curve to the left. | d. | make the IS curve
steeper. |
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