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Curriculum› Econ 101, Part 9: Macroeconomics Deep Dive› Econ 101, Part 9: Checkpoint 1

Checkpoint quiz · Econ 101, Part 9: Macroeconomics Deep Dive

Econ 101, Part 9: Checkpoint 1

Quick checkpoint - five questions on IS-LM, liquidity traps, the velocity of money, the impossible trinity and Ricardian equivalence.

Quick checkpoint - five questions on IS-LM, liquidity traps, the velocity of money, the impossible trinity and Ricardian equivalence.

Question 1 of 5 In the IS-LM model, what happens when the government increases spending?

Output falls and interest rates fall Output rises and interest rates rise, which can crowd out some private investment Nothing changes Only prices change

Higher spending raises output and money demand, pushing up interest rates and reducing some private investment.

Question 2 of 5 What is a liquidity trap?

A situation where banks run out of cash A situation where interest rates near zero stop stimulating the economy A type of savings account A tax on bank deposits

When rates cannot fall further, conventional monetary policy loses power.

Question 3 of 5 Why did huge money creation after 2008 not cause high inflation for years?

Because money printing was illegal Because the velocity of money fell as banks and people held on to money Because prices were fixed by law Because output collapsed to zero

Money circulated more slowly, weakening the link between money and prices.

Question 4 of 5 According to the impossible trinity, a country cannot simultaneously have

Exports, imports and tourism A fixed exchange rate, free capital movement and independent monetary policy Low inflation, high growth and full employment Taxes, spending and borrowing

A country can have at most two of these three goals at the same time.

Question 5 of 5 What does Ricardian equivalence suggest about a tax cut financed by borrowing?

People will spend all of it immediately People may save it to pay expected future taxes, limiting its effect on spending It will always cause hyperinflation It reduces government debt

Forward-looking households may save the tax cut, though evidence shows the effect is only partial.

← Back to Ricardian Equivalence Next lesson → Sticky Prices and Menu Costs

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