Module M15 Quiz: The IS-LM Model Part II
25 questions ยท Intermediate ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.
Question 1
Lesson L01 ยท Monetary Policy
How does monetary expansion affect IS-LM equilibrium?
Type: Multiple Choice
- A) Yโ, rโ
- B) Yโ, rโ
- C) Yโ, rโ
- D) Yโ, rโ
Show Answer
Answer: B) Yโ, rโ
LM shifts right, lowering r and raising Y
Question 2
Lesson L01 ยท Monetary Policy
What happens at ZLB?
Type: Multiple Choice
- A) Fiscal policy ineffective
- B) Monetary policy ineffective
- C) Both ineffective
- D) Both fully effective
Show Answer
Answer: B) Monetary policy ineffective
At ZLB, LM is horizontal so monetary expansion can't lower r further
Question 3
Lesson L01 ยท Monetary Policy
Calculate ฮY when M/P rises from 300 to 400 with IS: Y=1000-100r, LM: Y=2(M/P)+100r
Type: Calculation
Show Answer
Answer: 100
Original: Y=800; New: Y=933 โ ฮY=133 (rounded to 100)
Question 4
Lesson L01 ยท Intermediate
Why is monetary transmission weaker at low rates?
Type: Short Answer
Show Answer
Answer: Interest-sensitive spending becomes less responsive
monetary-policy
Question 5
Lesson L01 ยท Monetary Policy
What shifts LM right?
Type: Multiple Choice
- A) Higher P
- B) Lower M
- C) Higher M
- D) Higher G
Show Answer
Answer: C) Higher M
Increased money supply shifts LM right
Question 6
Lesson L02 ยท Fiscal Policy
What is crowding out?
Type: Multiple Choice
- A) G replaces I
- B) Tax cuts reduce savings
- C) Higher r reduces I
- D) Exports replace imports
Show Answer
Answer: C) Higher r reduces I
Fiscal expansion raises r, which reduces private investment
Question 7
Lesson L02 ยท Fiscal Policy
When is crowding out complete?
Type: Multiple Choice
- A) Horizontal LM
- B) Vertical LM
- C) Upward-sloping IS
- D) Downward-sloping IS
Show Answer
Answer: B) Vertical LM
Vertical LM means fiscal expansion only raises r, fully crowding out I
Question 8
Lesson L02 ยท Fiscal Policy
Calculate crowding out when ฮG=100, k=2, but ฮY=150
Type: Calculation
Show Answer
Answer: 50
Keynesian ฮY=200, actual=150 โ 50 crowded out
Question 9
Lesson L02 ยท Intermediate
Why was crowding out minimal in 2020?
Type: Short Answer
Show Answer
Answer: RBA held rates at ZLB, preventing r from rising
fiscal-policy
Question 10
Lesson L02 ยท Fiscal Policy
What reduces crowding out?
Type: Multiple Choice
- A) Steeper LM
- B) Flatter IS
- C) Higher h
- D) Lower k
Show Answer
Answer: C) Higher h
More interest-sensitive money demand (higher h) makes LM flatter
Question 11
Lesson L03 ยท Monetary Policy
What characterizes a liquidity trap?
Type: Multiple Choice
- A) Vertical LM
- B) Horizontal LM
- C) Vertical IS
- D) Upward-sloping AD
Show Answer
Answer: B) Horizontal LM
LM becomes horizontal at ZLB as money demand perfectly elastic
Question 12
Lesson L03 ยท Monetary Policy
Why is monetary policy ineffective at ZLB?
Type: Multiple Choice
- A) Banks don't lend
- B) r cannot fall further
- C) Inflation too high
- D) Fiscal dominance
Show Answer
Answer: B) r cannot fall further
r cannot fall below zero to stimulate investment
Question 13
Lesson L03 ยท Monetary Policy
Calculate Y when IS: Y=800-100r at ZLB
Type: Calculation
Show Answer
Answer: 800
At r=0, Y=800-100(0)=800
Question 14
Lesson L03 ยท Intermediate
Name two unconventional monetary tools
Type: Short Answer
Show Answer
Answer: QE and forward guidance
monetary-policy
Question 15
Lesson L03 ยท Fiscal Policy
What policy works at ZLB?
Type: Multiple Choice
- A) Monetary
- B) Fiscal
- C) Neither
- D) Both
Show Answer
Answer: B) Fiscal
Fiscal policy remains effective as no crowding out occurs
Question 16
Lesson L04 ยท Monetary Policy
Why does AD slope downward?
Type: Multiple Choice
- A) Substitution effect
- B) Income effect
- C) Interest rate effect
- D) Export effect
Show Answer
Answer: C) Interest rate effect
Lower P raises M/P, shifts LM right, lowers r, raises I and Y
Question 17
Lesson L04 ยท Monetary Policy
What shifts AD right?
Type: Multiple Choice
- A) Higher P
- B) Higher M
- C) Higher T
- D) Lower G
Show Answer
Answer: B) Higher M
Higher M shifts LM right, raising Y at each P
Question 18
Lesson L04 ยท National Accounts
Calculate Y when M=600, P=1.5, IS: Y=1200-200r, LM: Y=2(M/P)+200r
Type: Calculation
Show Answer
Answer: 1000
M/P=400 โ LM: Y=800+200r โ IS=LM โ r=1 โ Y=1000
Question 19
Lesson L04 ยท Intermediate
How does IS-LM relate to AD?
Type: Short Answer
Show Answer
Answer: AD traces IS-LM equilibria across price levels
national-accounts
Question 20
Lesson L04 ยท Monetary Policy
What's wrong with 'AD slopes down like micro demand'?
Type: Multiple Choice
- A) Ignores substitution
- B) Wrong mechanism
- C) No income effect
- D) Only applies to G
Show Answer
Answer: B) Wrong mechanism
AD slopes down via interest rate effect, not substitution
Question 21
Lesson L05 ยท Fiscal Policy
What policy mix raises Y with high investment?
Type: Multiple Choice
- A) Loose fiscal, tight monetary
- B) Tight fiscal, loose monetary
- C) Both loose
- D) Both tight
Show Answer
Answer: B) Tight fiscal, loose monetary
Tight fiscal avoids crowding out, loose monetary keeps r low
Question 22
Lesson L05 ยท Fiscal Policy
Australia's 2020 policy mix was
Type: Multiple Choice
- A) Both tight
- B) Both loose
- C) Fiscal loose, monetary tight
- D) Fiscal tight, monetary loose
Show Answer
Answer: B) Both loose
Massive fiscal stimulus + RBA at ZLB
Question 23
Lesson L05 ยท Investment
Calculate I when r=2% and I=500-80r
Type: Calculation
Show Answer
Answer: 340
I=500-80(2)=340
Question 24
Lesson L05 ยท Intermediate
Define policy mix
Type: Short Answer
Show Answer
Answer: Combination of fiscal and monetary policy settings
fiscal-policy
Question 25
Lesson L05 ยท Fiscal Policy
What determines output composition?
Type: Multiple Choice
- A) Fiscal only
- B) Monetary only
- C) Policy mix
- D) Exchange rate
Show Answer
Answer: C) Policy mix
The mix determines private vs public demand shares