Question

1. If the money demand does not depend on the interest rate, then the LM curve ______.

a. is horizontal

b. is vertical

c. shifts up to the right

d. shifts down to the right

2. If money demand becomes more income elastic, the LM curve will __________.

a. become flatter

b. shift to the right

c. become stepper

d. shift to the left

3. The labour force is defined as _________.

a. the total number of working age individuals in the population

b. the sum of employed and unemployed

c. the sum of the number of employed, unemployed and discouraged individuals

d. the total number employed

4.

In the IS-LM model, an increase in money supply will _______.

a. increase income but decrease interest rates
b. decrease income but increase interest rates

c. increase income and interest rates

d. decrease income and interest rates

5. Efficiency wages refer to wages set at a level _________.

a. to maximise union members’ total earnings

b. to encourage greater worker productivity

c. that would make the natural rate of unemployment zero

d. that would result in equilibrium in the labour market of each industry

6. In the IS-LM model, if interest rates rise while output falls the _________.
a. money supply must have fallen

b. price level must have fallen
c. level of government spending must have fallen
d. level of government spending must have risen

7. If there is a decrease in government expenditures, then the ___________.
a. LM curve will shift to the left
b. LM curve will become flatter and shift to the left
c. IS curve will shift to the left
d. IS curve will become steeper and shift to the left

8.  The IS curve is ______.
a. negatively sloped
b. positively sloped
c. shifted by change in money supply
d. a and c

9.

Why is there a negative relationship between unemployment and the real wage?
a. Higher unemployment rates make workers more likely to look for better paying jobs.

b. Lower unemployment rates make workers less likely to look for better paying jobs.
c. Higher unemployment weakens workers’ position at the bargaining table.
d. Higher unemployment empowers workers at the bargaining table.

10. If goods markets are perfectly competitive, the markup of the price over cost (m) is _________.
a. equal to one
b. greater than one
c. equal to zero
d. greater than zero

Answer 1

1..)

Answer: ( B)

If money demand does not depends on interest rate, it suggests that change in interest rate does not affect demand for money. Thus, LM curve becomes vertical.

2)

Answer: ( C)

More income elastic LM curve means rise in income leads to larger rise in the demand for money. So LM curve becomes steeper.

3)

Answer: ( B)

Labor force includes only employed and unemployed. Discouraged workers are not part of labor force even though these workers do not have job.

4)

Answer: ( A)

Increase in money supply shifts the LM curve to right thereby pulling down interest rate and raising the level of output.

5)

Answer: (B)

Efficiency wage is greater than the minimum wage. It is usually offered to retain highly productive workers or encouraging workers to do more productive activities.

6)

Answer: ( A)

When money supply falls, the LM curve shifts to left thereby pushing up interest rate and decreasing output level.