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BSP2001 - Macro and International Economics Sem 1 2013/2014

Topic 4

Practice Multiple Choice Questions


1) Which of the following occurs as we move rightward along the IS curve?
A) The decline in interest rate causes investment spending to increase.
B) The rise in interest rate causes investment spending to decrease.
C) The decline in interest rate causes money demand to increase.
D) The rise in interest rate causes the Central Bank to increase the money supply.


2) Ceteris paribus, an increase in the budget deficit will cause the _______.
A) IS curve to shift left.
B) IS curve to shift right.
C) LM curve to shift left.
D) LM curve to shift right.


3) Which of the following will shift the IS curve?
A) Changes to transfer payments.
B) Changes to consumer confidence.
C) All of the above.
D) None of the above.


4) When both government purchases and lump-sum tax are decreased by an equal
amount, the interest rate will _____; and the real GDP will _____.
A) increase; decrease.
B) decrease; increase.
C) increase; increase.
D) decrease; decrease.


5) According to the ISLM framework, the interest rate serves as a link between
_______.
A) household saving and business investment.
B) actions of the Central Bank and changes in consumer spending.
C) the goods market and the assets market.
D) domestic markets and foreign markets.




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6) To increase output without changing the interest rate, you should conduct_______.
A) both fiscal and monetary expansion.
B) both fiscal and monetary contraction.
C) fiscal expansion and monetary contraction.
D) fiscal contraction and monetary expansion.


7) Which of the following about the LM curve is true?
A) LM curve is upward sloping because a higher income level is always associated with
a higher nominal money supply.
B) LM curve shows the combinations of the interest rate and the income level such that
money supply and money demand are equal.
C) An increase in money supply will cause a movement along the LM curve.
D) All of the above.



8) Which of the following will shift the LM curve to the right?
A) Decrease in income tax.
B) Increase in lump-sum tax.
C) Open market sale of bonds.
D) Quantitative easing.


9) "Crowding out" refers to the fact that _______.
A) fiscal policy cannot be used to shift the IS curve.
B) falling interest rate stimulates investment spending.
C) rising interest rate tends to accompany an expansionary fiscal policy.
D) an aggressive expansionary monetary policy can lower interest rate to zero bound.


10) In a liquidity trap, the _______ is relatively _______.
A) LM curve; vertical.
B) LM curve; horizontal.
C) IS curve; vertical.
D) IS curve; horizontal.










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Solution:

1) A
2) B
3) C
4) D
5) C
6) A
7) B
8) D
9) C
10) B