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1. In the IS-LM framework, what does the IS curve represent?
A) Equilibrium in the money market.
B) Equilibrium in the goods market.
C) The relationship between inflation and unemployment.
D) The balance of payments equilibrium.
2. What is the typical slope of the LM curve and why?
A) Negative, because higher income reduces money demand.
B) Vertical, because money supply is always fixed by the central bank.
C) Positive, because higher income increases the demand for money, requiring a higher interest rate to restore equilibrium.
D) Horizontal, representing the liquidity trap.
3. Which of the following would cause a rightward shift in the IS curve?
A) An increase in government spending.
B) An increase in the money supply.
C) An increase in taxes.
D) A decrease in autonomous investment.
4. A decrease in the nominal money supply, holding prices constant, will cause:
A) The LM curve to shift to the right.
B) The IS curve to shift to the left.
C) The LM curve to shift to the left.
D) The IS curve to shift to the right.
5. The "Liquidity Trap" is characterized by:
A) A vertical IS curve.
B) A horizontal LM curve at very low interest rates.
C) A vertical LM curve.
D) A horizontal IS curve.
6. If the economy is in a liquidity trap, which policy is most effective at increasing output?
A) Monetary policy.
B) Fiscal policy.
C) Decreasing the money supply.
D) Neither fiscal nor monetary policy.
7. Crowding out occurs when:
A) Government spending increases interest rates, which reduces private investment.
B) Monetary policy reduces the interest rate, increasing investment.
C) Higher taxes lead to a surplus in the budget.
D) A decrease in the money supply increases the interest rate.
8. In the Classical case where the LM curve is vertical, an increase in government spending will:
A) Increase both income and interest rates.
B) Increase interest rates but leave income unchanged.
C) Increase income but leave interest rates unchanged.
D) Decrease both income and interest rates.
9. A simultaneous increase in government spending and an increase in the money supply will definitely:
A) Increase the interest rate.
B) Increase the level of income.
C) Decrease the level of income.
D) Decrease the interest rate.
10. If investment is completely insensitive to the interest rate (interest-inelastic), the IS curve is:
A) Horizontal.
B) Upward sloping.
C) Vertical.
D) Identical to the LM curve.

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