Module M17 Quiz: The IS-LM-PC Model

25 questions · Intermediate · 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.

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Question 1

Lesson L01 · Inflation

What determines the intercept of the Phillips Curve?

Type: Multiple Choice

• A) Output gap
• B) Expected inflation (πᵉ)
• C) Supply shocks (ε)
• D) Natural rate of unemployment

Show Answer

Answer: B) Expected inflation (πᵉ)

πᵉ sets the baseline inflation level before any output gap or shock

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Question 2

Lesson L01 · 2.5%

If Y=102

Type: Short Answer

Show Answer

Answer: mcq

2.0%

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Question 3

*Lesson L01 · *

Calculate π if Yₙ=500

Type: Short Answer

Show Answer

Answer:

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Question 4

Lesson L01 · Intermediate

Why can't the central bank permanently lower unemployment by accepting higher inflation?

Type: Short Answer

Show Answer

Answer: Expectations adjust (πᵉ rises), shifting PC up. No long-run tradeoff, only short-run.

unemployment

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Question 5

Lesson L01 · 5.0%

If β=0.6

Type: Short Answer

Show Answer

Answer: 3.0%

4.8%

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Question 6

Lesson L02 · Inflation

What shifts the PC upward in period 2 after a demand shock?

Type: Multiple Choice

• A) Higher output gap
• B) Adaptive expectations (πᵉ=π₁)
• C) Supply shocks
• D) Lower natural rate

Show Answer

Answer: B) Adaptive expectations (πᵉ=π₁)

πᵉ adjusts to last period's π, shifting PC

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Question 7

Lesson L02 · Monetary Policy

Why does credible inflation targeting reduce adjustment costs?

Type: Multiple Choice

• A) It prevents πᵉ from rising
• B) It eliminates supply shocks
• C) It makes Yₙ grow faster
• D) It reduces β

Show Answer

Answer: A) It prevents πᵉ from rising

Anchored πᵉ prevents PC shifts, allowing gentler adjustment

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Question 8

*Lesson L02 · *

If Y₁=510

Type: Short Answer

Show Answer

Answer:

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Question 9

Lesson L02 · Intermediate

Why did the RBA raise rates rapidly in 2022-23?

Type: Short Answer

Show Answer

Answer: To close output gap before πᵉ de-anchored, minimizing long-run costs

monetary-policy

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Question 10

Lesson L02 · Large Rate Cut

If gap=+3%

Type: Short Answer

Show Answer

Answer: No change

Small rate rise

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Question 11

Lesson L03 · Inflation

What creates stagflation (high π + high u)?

Type: Multiple Choice

• A) Positive demand shock
• B) Negative supply shock
• C) Lower πᵉ
• D) Fiscal stimulus

Show Answer

Answer: B) Negative supply shock

Negative supply shock (ε>0) raises π even at Y=Yₙ

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Question 12

Lesson L03 · 4%

If ε=2%

Type: Short Answer

Show Answer

Answer: -1%

-2%

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Question 13

*Lesson L03 · *

Calculate required Y if Yₙ=200

Type: Short Answer

Show Answer

Answer:

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Question 14

Lesson L03 · Intermediate

Why can't monetary policy fully offset a supply shock without cost?

Type: Short Answer

Show Answer

Answer: Must create recession (Y0 via negative gap

inflation

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Question 15

Lesson L03 · Monetary Policy

What policy response suits a temporary positive supply shock (ε<0)?

Type: Multiple Choice

• A) Tighten to prevent π<π*
• B) Accommodate to boost Y
• C) No change needed
• D) Target higher π*

Show Answer

Answer: B) Accommodate to boost Y

Can safely stimulate Y without inflation risk

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Question 16

Lesson L04 · Monetary Policy

What is the Taylor principle?

Type: Multiple Choice

• A) i should rise <1:1 with π
• B) i should rise >1:1 with π
• C) Keep Y=Yₙ always
• D) Nominal rate = r* + π

Show Answer

Answer: B) i should rise >1:1 with π

Real rate must rise with π (i rises >1:1 with π)

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Question 17

Lesson L04 · 4.25%

If r*=1%

Type: Short Answer

Show Answer

Answer: mcq

3.5%

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Question 18

*Lesson L04 · *

Calculate i if r*=0.5%

Type: Short Answer

Show Answer

Answer:

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Question 19

Lesson L04 · Intermediate

Why might the RBA deviate from the Taylor rule prescription?

Type: Short Answer

Show Answer

Answer: Financial stability, supply shocks, or forward-looking expectations

monetary-policy

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Question 20

Lesson L04 · Monetary Policy

What coefficient ensures the Taylor principle holds?

Type: Multiple Choice

• A) α_π > 0
• B) α_Y > 0
• C) α_π + α_Y > 1
• D) 1 + α_π > 1

Show Answer

Answer: D) 1 + α_π > 1

Coefficient on π in full rule must exceed 1

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Question 21

Lesson L05 · Y=Yₙ

What defines medium-run equilibrium?

Type: Multiple Choice

• A) Y=Yₙ
• B) π=πᵉ=π*
• C) Y grows steadily
• D) π=0

Show Answer

Answer: UNEMPLOYMENT AT NAIRU) Unemployment at NAIRU

π arbitrary

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Question 22

Lesson L05 · C

If r*=1%

Type: Short Answer

Show Answer

Answer: 3.5%

4.0%

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Question 23

Lesson L05 · 2.5=4.5+0.5×Gap → Gap= 4%

Calculate required gap to reduce π from 4.5% to 2.5% if β=0.5

Type: Short Answer

Show Answer

Answer:

-4%

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Question 24

Lesson L05 · Intermediate

Why does "on average over time" inflation targeting aid stability?

Type: Short Answer

Show Answer

Answer: Allows temporary deviations while anchoring πᵉ long-run

monetary-policy

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Question 25

Lesson L05 · Monetary Policy

What breaks medium-run equilibrium stability?

Type: Multiple Choice

• A) Anchored πᵉ
• B) CB commitment to π*
• C) De-anchored expectations
• D) Fiscal stimulus

Show Answer

Answer: C) De-anchored expectations

Without anchored πᵉ, PC shifts prevent convergence

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