2. Macroeconomics

Is-lm Framework — Quiz

Test your understanding of is-lm framework with 5 practice questions.

Practice Questions

Question 1

Given the IS equation $Y = 200 - 10r$ and the LM equation $Y = 50 + 2r$, what are the equilibrium values of $r$ and $Y$?

Question 2

If the overall price level $P$ rises while nominal money supply and fiscal policy remain constant, how does the LM curve shift and what is the effect on equilibrium output $Y$ and interest rate $r$?

Question 3

In a liquidity trap where the LM curve is horizontal at a low interest rate, what is the effect of an expansionary monetary policy (increase in nominal money supply) on equilibrium $Y$ and $r$?

Question 4

If the marginal propensity to consume is $0.8$, what is the government spending multiplier in the simple Keynesian IS model?

Question 5

How does an increase in the interest-sensitivity of investment (i.e., investment function $I = I_0 - br$ with larger $b$) affect the slope of the IS curve?