3. Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the
interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the
price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the
money supply at:
A) 2,000.
B) 1,800.
C) 1,600.
D) 1,400.
4. In the Keynesian cross model, the distance between the 45 degree line and the planned
expenditures line indicates the amount of the:
A) liquidity preference.
B) the government-purchases multiplier.
C) unplanned inventory investment.
D) real money balances.
5. If C = 200 + 0.75(Y – T) and I = 200 – 25r, then the formula for the IS curve is:
A) Y = 400 – 0.75T – 25r + G.
B) Y = 1,600 – 3T – 100r + 4G.
C) Y = 400 + 0.75T – 25r – G.
D) Y = 1,600 + 3T – 100r – 4G.
6. The intersection of the IS and LM curves determines the values of:
A) r, Y, and P, given G, T, and M.
B) r, Y, and M, given G, T, and P.
C) r and Y, given G, T, M, and P.
D) p and Y, given G, T, and M.
7. If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then
equilibrium income rises by:
A) G/(1 – MPC).
B) more than zero but less than G/(1 – MPC).
C) G.
D) zero.