Question

17) According to the Mundell–Fleming model, under:
A) floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.
B) both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does not.
C) both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does not.
D) floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.

18) In the IS–LM model when taxation increases, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.
A) rises; falls
B) rises; rises

C) falls; rises

D) falls; falls

19) If the LM curve is vertical and government spending rises by ΔG, in the IS–LM analysis, then equilibrium income rises by:
A) ΔG/(1 – MPC).
B) more than zero but less than ΔG/(1 – MPC).

C) ΔG. D) zero.

20) If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:
A) 100.
B) 200.

C) 300. D) 400.

21) The increase in income in response to a fiscal expansion in the IS–LM is:

A) always less than in the Keynesian-cross model.
B) less than in the Keynesian-cross model unless the LM curve is vertical.

C) less than in the Keynesian-cross model unless the LM curve is horizontal.

D) less than in the Keynesian-cross model unless the IS curve is vertical.

Answer 1

17) According to Mundell- Flemming model, In case of flexible or floating exchange rates, a monetary expansion raises income whereas a fiscal expansion doesn't, but under the fixed exchange rates, situation is reversed wherein a fiscal expansion raises income but a monetary expansion doesn't.

Option A is correct.

18) An Increase in taxation Decreases disposable income and Consumption, thus shifting IS curve to the left. This leads to a fall in interest rate and a fall in output I'm Short run Equilibrium.

Option D is correct.

19) If LM Curve is vertical, then any Increase in Governement Spending won't alter the equilibrium income. Therefore Equilibrium income Increases by 0.

Option D is correct.

20) Governement Spending Multiplier= 1/(1-MPC)= 4

IS curve shifts for any given interest rate by amount= Governement Spending Multiplier× Increase in Governement Spending= 4×100= 400

Option D is correct

21) If LM Curve is not horizontal in IS-LM framework, then Increase in income due to a fiscal expansion is always less than Keynesian-Cross model. However, if LM Curve is horizontal, then Increase in income due to a fiscal expansion will be equal to Keynesian-Cross model.

Therefore option C is correct.