1. Which of the following can be regarded as the fully exogenous variables in the IS-LM model?
a. Nominal money supply.
b. Taxes.
c. Investment spending.
d. Government spending.
1. a, b, c and d
2. b, c and d
3. a, c and d
4. Only b and d
5. Only a, b and d
Explanation: The three critical exogenous – i.e. external – variables in the IS-LM model are liquidity,
investment, and consumption. According to the theory, liquidity is determined by the size and velocity of
the money supply. The levels of investing and consumption are determined by the marginal decisions of
individual actors.
2. Which of the following statements is/are correct? In the IS-LM model:
a. Investment is influenced by the interest rate only.
b. Investment is influenced by exogenous factors such as expectations, business confidence and
regulations.
c. Investment is influenced by the interest rate and the level of output.
d. Investment is negatively related to the interest rate and the level of output.
e. Investment is negatively related to the interest rate and positively related to the level of output.
1. a and b
2. b, c and e
3. b, c and d
4. a and e
5. Only c and e
3. Which of the following statements is/are correct?
a. The positive relationship between the level of output and investment spending is represented by Y↑
→ I↓.
b. An increase in the interest rate decreases investment spending which decreases the demand for goods
and the equilibrium level of income falls.
c. An increase in investors’ confidence increases investment spending.
d. When deriving the IS curve the following chain of events describes what happens on the goods market
if the interest rate decreases:
i↓ → I↑ → T↓ → YD↑ → Z↑ → Y↑.
1. Only a and b
2. Only b and c
3. b, c and d
4. a, b and c
5. Only c
Explanation: There is positive relationship between investment and output, but however the causality runs
from investment to output since investment is regarded as exogenously determined. An increase in the interest
rate decreases investment spending which decreases the demand for goods [Since investment is a component
of national output] and the equilibrium level of income falls.
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