31-50 tough and highly challenging multiple-choice questions on the IS-LM model and its components, along with their answers:
31. **Fiscal Policy Multiplier**:
Question: In the IS-LM model, if the government increases government spending and the marginal propensity to consume (MPC) is low, what is the expected impact on equilibrium income?
a) A large increase in income.
b) A small increase in income.
c) No change in income.
d) A decrease in income.
Correct Answer: a) A large increase in income.
32. **LM Curve Shifts and Money Demand**:
Question: If there is a significant increase in the liquidity preference of households and firms in the LM curve of the IS-LM model, what happens to equilibrium interest rates and income levels?
a) Interest rates fall, income levels rise.
b) Interest rates rise, income levels rise.
c) Interest rates and income levels both fall.
d) Interest rates and income levels both rise.
Correct Answer: b) Interest rates rise, income levels rise.
33. **Fiscal and Monetary Policy Mix**:
Question: In the IS-LM model, if the government decreases government spending while the central bank increases the money supply, what is the combined effect on equilibrium income and interest rates?
a) Income rises, interest rates rise.
b) Income falls, interest rates fall.
c) Income falls, interest rates rise.
d) Income rises, interest rates fall.
Correct Answer: d) Income rises, interest rates fall.
34. **IS Curve Shift Effects**:
Question: If there is an increase in consumer confidence and a decrease in taxes in the IS-LM model, what happens to the IS curve?
a) The IS curve shifts to the right.
b) The IS curve shifts to the left.
c) The IS curve becomes steeper.
d) The IS curve becomes flatter.
Correct Answer: a) The IS curve shifts to the right.
35. **Interest Rate Elasticity of Money Demand**:
Question: In the LM curve of the IS-LM model, if the interest rate elasticity of money demand is very high, what effect does this have on the slope of the LM curve?
a) The LM curve becomes steeper.
b) The LM curve becomes flatter.
c) The LM curve shifts to the right.
d) The LM curve shifts to the left.
Correct Answer: b) The LM curve becomes flatter.
36. **Policy Mix and Monetary Dominance**:
Question: In the IS-LM model, if monetary policy is dominant, what is the likely outcome when the central bank decreases the money supply and the government increases government spending?
a) Income rises, interest rates rise.
b) Income falls, interest rates fall.
c) Income falls, interest rates rise.
d) Income rises, interest rates fall.
Correct Answer: c) Income falls, interest rates rise.
37. **Investment and IS Curve**:
Question: In the IS-LM model, if there is a sudden increase in business investment due to technological advancements, what happens to the IS curve?
a) The IS curve shifts to the right.
b) The IS curve shifts to the left.
c) The IS curve steepens.
d) The IS curve flattens.
Correct Answer: a) The IS curve shifts to the right.
38. **Interest Rate Sensitivity and Investment**:
Question: In the IS-LM model, if investment becomes very insensitive to changes in interest rates, how does this affect the IS curve?
a) The IS curve becomes steeper.
b) The IS curve becomes flatter.
c) The IS curve shifts to the right.
d) The IS curve shifts to the left.
Correct Answer: b) The IS curve becomes flatter.
39. **Money Supply and Monetary Policy Tools**:
Question: In the IS-LM model, besides open market operations, what other tool can the central bank use to influence the money supply?
a) Discount rate.
b) Fiscal policy.
c) Exchange rate policy.
d) Government spending.
Correct Answer: a) Discount rate.
40. **Investment and Business Expectations**:
Question: In the IS-LM model, if business expectations become highly optimistic, what is the likely effect on the IS curve?
a) The IS curve shifts to the right.
b) The IS curve shifts to the left.
c) The IS curve steepens.
d) The IS curve flattens.
Correct Answer: a) The IS curve shifts to the right.
41. **Income and Money Demand**:
Question: In the LM curve of the IS-LM model, if the income elasticity of money demand is negative, what happens to the LM curve?
a) The LM curve shifts to the right.
b) The LM curve shifts to the left.
c) The LM curve becomes steeper.
d) The LM curve becomes flatter.
Correct Answer: b) The LM curve shifts to the left.
42. **Monetary Policy and Money Supply Contraction**:
Question: In the IS-LM model, if the central bank conducts an open market sale of government bonds, what effect does this have on the money supply and interest rates?
a) Money supply decreases, interest rates rise.
b) Money supply decreases, interest rates fall.
c) Money supply increases, interest rates rise.
d) Money supply increases, interest rates fall.
Correct Answer: a) Money supply decreases, interest rates rise.
43. **Fiscal Policy and Tax Changes**:
Question: If the government decreases government spending and increases taxes in the IS-LM model, what is the expected outcome for equilibrium income and interest rates?
a) Income rises, interest rates rise.
b) Income falls, interest rates fall.
c) Income falls, interest rates rise.
d) Income rises, interest rates fall.
Correct Answer: c) Income
falls, interest rates rise.
44. **Interest Rate Sensitivity and IS Curve**:
Question: In the IS-LM model, if households and firms become highly sensitive to changes in interest rates, how does this affect the IS curve?
a) The IS curve becomes steeper.
b) The IS curve becomes flatter.
c) The IS curve shifts to the right.
d) The IS curve shifts to the left.
Correct Answer: c) The IS curve shifts to the right.
45. **Money Supply Elasticity and Monetary Policy**:
Question: In the IS-LM model, if the central bank increases the money supply significantly, what effect does this have on the LM curve?
a) The LM curve shifts to the right.
b) The LM curve shifts to the left.
c) The LM curve becomes steeper.
d) The LM curve becomes flatter.
Correct Answer: a) The LM curve shifts to the right.
46. **Policy Mix and Fiscal Policy Dominance**:
Question: In the IS-LM model, if fiscal policy is dominant, what is the likely outcome when the government decreases government spending and the central bank increases the money supply?
a) Income rises, interest rates rise.
b) Income falls, interest rates fall.
c) Income falls, interest rates rise.
d) Income rises, interest rates fall.
Correct Answer: d) Income rises, interest rates fall.
47. **Interest Rate Sensitivity and Consumption**:
Question: In the IS-LM model, if households become very sensitive to changes in interest rates when making consumption decisions, how does this affect the IS curve?
a) The IS curve becomes steeper.
b) The IS curve becomes flatter.
c) The IS curve shifts to the right.
d) The IS curve shifts to the left.
Correct Answer: c) The IS curve shifts to the right.
48. **Money Supply and Monetary Policy Impact**:
Question: In the IS-LM model, if the central bank conducts an open market purchase of long-term government bonds, what effect does this have on the money supply and interest rates?
a) Money supply increases, interest rates rise.
b) Money supply increases, interest rates fall.
c) Money supply decreases, interest rates rise.
d) Money supply decreases, interest rates fall.
Correct Answer: b) Money supply increases, interest rates fall.
49. **Fiscal Policy and Tax Multiplier**:
Question: In the IS-LM model, if the government decreases taxes while the marginal propensity to consume (MPC) is high, what is the expected impact on equilibrium income?
a) A large increase in income.
b) A small increase in income.
c) No change in income.
d) A decrease in income.
Correct Answer: a) A large increase in income.
50. **Investment and Technological Advancements**:
Question: In the IS-LM model, if there is a sudden increase in technological advancements leading to higher expected returns on investment, what happens to the IS curve?
a) The IS curve shifts to the right.
b) The IS curve shifts to the left.
c) The IS curve steepens.
d) The IS curve flattens.
Correct Answer: a) The IS curve shifts to the right.
These challenging questions should further deepen your understanding of the IS-LM model and its components at a university undergraduate level. If you have more questions or need additional information, feel free to ask!
