Applied Macroeconomics
Pre-Test Questions
Course Introduction
Applied Macroeconomics explores the practical aspects of macroeconomic theory by examining real-world issues such as economic growth, inflation, unemployment, monetary and fiscal policy, and international trade. The course emphasizes the use of macroeconomic models and empirical data to analyze current economic trends and policy decisions at both national and global levels. Students engage with case studies, policy simulations, and data-driven projects to develop the skills necessary to interpret economic indicators, forecast economic conditions, and evaluate the effectiveness of economic policies in addressing contemporary macroeconomic challenges.
Recommended Textbook
The Economics of Money Banking and Financial Markets 10th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, banking, and Financial Markets
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Sample Questions
Q1) An increase in interest rates might ________ saving because more can be earned in interest income.
A) encourage
B) discourage C) disallow
D) invalidate
Answer: A
Q2) Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
Answer: D
Q3) Which of the following items are not counted in U.S.GDP?
A) your purchase of a new Ford Mustang
B) your purchase of new tires for your old car
C) GM's purchase of tires for new cars
D) a foreign consumer's purchase of a new Ford Mustang
Answer: C
Page 3
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) One reason for the extraordinary growth of foreign financial markets is
A) decreased trade.
B) increases in the pool of savings in foreign countries.
C) the recent introduction of the foreign bond.
D) slower technological innovation in foreign markets.
Answer: B
Q2) The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) increase the information available to investors.
B) prevent bank panics.
C) improve monetary control.
D) protect investors against financial losses.
Answer: A
Q3) Which of the following benefit directly from any increase in the corporation's profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T-bill holder
Answer: C
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Chapter 3: What Is Money
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Sample Questions
Q1) To an economist,________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.
A) wealth
B) income
C) money
D) credit
Answer: C
Q2) If an individual moves money from a money market deposit account to currency,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
Q3) Which of the following statements best explains how the use of money in an economy increases economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
Answer: C
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) Which of the following $5,000 face-value securities has the highest yield to maturity?
A) A 6 percent coupon bond selling for $5,000
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
Q2) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent,then the real interest rate on this bond is
A) -3 percent.
B) -2 percent.
C) 3 percent.
D) 7 percent.
Q3) The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount
D) market
Q4) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.
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Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) Everything else held constant,during a business cycle expansion,the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities,while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.
A) right; left
B) right; right
C) left; left
D) left; right
Q2) The bond supply and demand framework is easier to use when analyzing the effects of changes in ________,while the liquidity preference framework provides a simpler analysis of the effects from changes in income,the price level,and the supply of
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
Q3) Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.
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Chapter 6: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?
Q2) The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.
A) less liquid than B) less speculative than
C) tax-exempt unlike D) lower-yielding than
Q3) When the yield curve is flat or downward-sloping,it suggest that the economy is more likely to enter
A) a recession.
B) an expansion.
C) a boom time.
D) a period of increasing output.
Q4) Which of the following long-term bonds has the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Sample Questions
Q1) Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100% chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?
Q2) If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates,then economics would say that expectation formation is
A) irrational.
B) rational.
C) adaptive.
D) reasonable.
Q3) People have a strong incentive to form rational expectations because A) they are guaranteed of success in the stock market.
B) it is costly not to do so.
C) it is costly to do so.
D) everyone wants to be rational.
Q4) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) The high growth rate in China in the last twenty years has similarities to the high growth rate of ________ during the 1950s and 1960s.
A) the United States
B) the Soviet Union
C) Brazil
D) Mexico
Q2) Of the following sources of external finance for American nonfinancial businesses,the least important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) loans from other financial intermediaries.
Q3) One reason China has been able to grow so rapidly even though its financial development is still in its early stages is
A) the high savings rate of around 40%.
B) the shift of labor to the agricultural sector.
C) the stringent enforcement of financial contracts.
D) the ease of obtaining high-quality information about creditors.
Q4) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Financial Crises
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Sample Questions
Q1) Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a
A) severe adverse selection problem.
B) decline in mortgage applications.
C) call to deregulate the industry.
D) decrease in the demand for houses.
Q2) When financial intermediaries deleverage,firms cannot fund investment opportunities resulting in A) a contraction of economic activity.
B) an economic boom.
C) an increased opportunity for growth.
D) a call for government regulation.
Q3) Although the subprime mortgage market problem began in the United States,the first indication of the seriousness of the crisis began in A) Europe.
B) Australia.
C) China.
D) South America.
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Chapter 10: Banking and the Management of Financial Institutions
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Sample Questions
Q1) When you deposit $50 in currency at Old National Bank,
A) its assets increase by less than $50 because of reserve requirements.
B) its reserves increase by less than $50 because of reserve requirements.
C) its liabilities increase by $50.
D) its liabilities decrease by $50.
Q2) Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.
A) loans; deposits
B) securities; deposits
C) liabilities; assets
D) assets; liabilities
Q3) How can specializing in lending help to reduce the adverse selection problem in lending?
Q4) Which of the following is not a source of borrowings for a bank?
A) Federal funds
B) Eurodollars
C) Transaction deposits
D) Discount loans
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Chapter 11: Economic Analysis of Financial Regulation
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Sample Questions
Q1) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) separated investment banks and commercial banks.
B) restricted the use of ATS accounts.
C) imposed restrictive usury ceilings on large agricultural loans.
D) increased deposit insurance from $40,000 to $100,000.
Q2) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance
A) are likely to take on greater risks than they otherwise would.
B) are likely to be too conservative, reducing the probability of turning a profit.
C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety.
D) are placed at a competitive disadvantage in acquiring funds.
Q3) One of the problems experienced by the savings and loan industry during the 1980s was
A) managers lack of expertise to manage risk in new lines of business.
B) heavy regulations in the new areas open to S&Ls.
C) slow growth in lending.
D) close monitoring by the FSLIC.
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Page 13
Chapter 12: Banking Industry: Structure and Competition
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Sample Questions
Q1) Financial instruments whose payoffs are linked to previously issued securities are called
A) grandfathered bonds.
B) financial derivatives.
C) hedge securities.
D) reversible bonds.
Q2) The most important source of the changes in supply conditions that stimulate financial innovation has been the
A) deregulation of financial institutions.
B) dramatic increase in the volatility of interest rates.
C) improvement in computer and telecommunications technology.
D) dramatic increase in competition from foreign banks.
Q3) The U.S.banking system is considered to be a dual system because
A) banks offer both checking and savings accounts.
B) it actually includes both banks and thrift institutions.
C) it is regulated by both state and federal governments.
D) it was established before the Civil War, requiring separate regulatory bodies for the North and South.
Q4) Why did the interest rate volatility of the 1970s spur financial innovation?
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Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The majority of members of the Federal Open Market Committee are
A) Federal Reserve Bank presidents.
B) members of the Federal Advisory Council.
C) presidents of member banks.
D) the seven Federal Reserve governors.
Q2) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?
A) Philadelphia
B) Boston
C) San Francisco
D) New York
Q3) While the discount rate is "established" by the regional Federal Reserve Banks,in truth,the rate is determined by
A) Congress.
B) the president of the United States.
C) the Senate.
D) the Board of Governors.
Q4) Explain two concepts of central bank independence.Is the Fed politically independent? Why do economists think central bank independence is important?
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) An increase in the monetary base that goes into ________ is not multiplied,while an increase that goes into ________ is multiplied.
A) deposits; currency
B) excess reserves; currency
C) currency; excess reserves
D) currency; deposits
Q2) Which of the following are not liabilities on the Fed's balance sheet?
A) Discount loans
B) Bank deposits
C) Deferred availability cash items
D) U.S. Treasury deposits
Q3) If the required reserve ratio is 10 percent,currency in circulation is $400 billion,checkable deposits are $800 billion,and excess reserves total $0.8 billion,then the M1 money multiplier is
A) 2.5.
B) 1.67.
C) 2.0.
D) 0.601.
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) When the European System of Central Banks uses long-term refinancing operations,it is similar to the Federal Reserve using
A) dynamic open market operations.
B) defensive open market operations.
C) discount policy.
D) reserve requirements.
Q2) The Federal Reserve has had the authority to vary reserve requirements since the A) 1920s.
B) 1930s.
C) 1940s.
D) 1950s.
Q3) In the market for reserves,if the federal funds rate is between the discount rate and the interest rate paid on excess reserves,an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise,everything else held constant.
A) decreases; demand
B) increases; demand
C) increases; supply
D) decreases; supply
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) A nominal variable,such as the inflation rate or the money supply,which ties down the price level to achieve price stability is called ________ anchor.
A) a nominal
B) a real
C) an operating
D) an intermediate
Q2) Targeting interest rates can be procyclical because
A) an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. B) an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. C) an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.
D) an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income.
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Chapter 17: The Foreign Exchange Market
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Sample Questions
Q1) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate,everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
Q2) Everything else held constant,when the current value of the domestic exchange rate increases,the ________ of domestic assets ________.
A) quantity supplied; does not change
B) supply; decreases
C) quantity supplied; increases
D) supply; increases
Q3) When the value of the dollar changes from £0.5 to £0.75,then the British pound has ________ and the U.S.dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
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Chapter 18: The International Financial System
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Q1) Under the current managed float exchange rate regime,countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.
A) surpluses; depreciate
B) deficits; depreciate
C) surpluses; appreciate D) deficits; appreciate
Q2) Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.
A) appreciate; less
B) appreciate; more
C) depreciate; less
D) depreciate; more
Q3) An ECU was
A) a paper substitute for gold issued by the IMF.
B) a loan by European countries to the IMF.
C) a paper currency issued by the European Common Market.
D) a monetary unit created by the European Monetary System.
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Chapter 19: Quantity Theory, inflation and the Demand for Money
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Q1) The portfolio theories of money demand state that when income (and therefore,wealth)is higher,the demand for the money asset will ________ and the demand for real money balances will be ________.
A) rise; higher B) rise; lower
C) fall; higher
D) fall; lower
Q2) Keynes hypothesized that the transactions component of money demand was primarily determined by the level of A) interest rates.
B) velocity.
C) income.
D) stock market prices.
Q3) If the money supply is $500 and nominal income is $3,000,the velocity of money is A) 1/60.
B) 1/6.
C) 6.
D) 60.
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Chapter 20: The Is Curve
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Sample Questions
Q1) If net exports decrease by 250 and the mpc is 0.75,equilibrium aggregate output
A) increases by 1000.
B) increases by 750.
C) decreases by 750.
D) decreases by 1000.
Q2) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
Q3) His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,government spending,and net exports.
A) John Maynard Keynes
B) Sir John Hicks
C) Milton Friedman
D) Paul A. Samuelson
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Page 22
Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Q1) Everything else held constant,a decrease in government spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Q2) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates,thereby ________ the level of equilibrium aggregate output.,everything else held constant.
A) real; lowering
B) real; raising
C) nominal; lowering
D) nominal; raising
Q3) Because prices are slow to move in the short-run,when the Federal Reserve lowers the federal funds rate,
A) nominal interest rates rise.
B) real interest rates fall.
C) inflation falls.
D) real interest rates rise.
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) The price of a barrel of oil doubled between 2007 and the middle of 2008.To make matters worse,a financial crisis hit the U.S.economy starting in August of 2007.Which of the following is an appropriate description of the mechanism that would have ensued?
A) The increase in the price of oil would have immediately shifted the AS curve to the right.
B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right.
C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run.
D) All of the above.
E) None of the above.
Q2) Everything else held constant,a change in workers' expectations about inflation will cause ________ to change.
A) aggregate demand
B) short-run aggregate supply
C) the production function
D) long-run aggregate supply
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Chapter 23: Monetary Policy Theory
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Q1) Policy makers cannot achieve both price stability and economic activity stability when facing
A) temporary supply shocks.
B) permanent supply shocks.
C) demand shocks.
D) all of the above.
Q2) When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run,then
A) aggregate demand curve shifts rightward.
B) output will be at its potential.
C) inflation rate will be higher.
D) all of the above.
E) both A and B.
Q3) The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand,thereby strengthening the case for
A) supply-side policy.
B) nonactivists.
C) activists.
D) demand-management policy.
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Chapter 24: The Role of Expectations in Monetary Policy
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Q1) Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target.
A) If the commitment is credible, the public's expected inflation will remain unchanged.
B) Credible policy produces better outcomes on both inflation and output in the short run.
C) Policies that are not credible produce worse economic contraction.
D) all of the above.
E) both A and C.
Q2) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible,then A) the public's expected inflation will remain unchanged.
B) the short-run aggregate supply curve will rise.
C) over time inflation will fall back down to the inflation target.
D) all of the above.
E) both A and B.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) According to Tobin's q theory,when equity prices are high the market price of existing capital is ________ relative to new capital,so expenditure on fixed investment is
A) cheap; low
B) dear ; low
C) cheap; high
D) dear; high
Q2) During the Great Depression,Tobin's q
A) rose dramatically, as did real interest rates.
B) fell to unprecedentedly low levels.
C) stayed fairly constant, in contrast to most other economic measures.
D) rose only slightly, in spite of Hoover's attempts to prop it up.
Q3) Recent Japanese experience has been characterized by tight monetary policy,as indicated by
A) falling interest rates.
B) short-term interest rates near zero.
C) falling asset prices.
D) low real interest rates.
Q4) Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.
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Chapter 26: The ISLM Model
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Q1) A decline in the money supply shifts the LM curve to the left,causing the interest rate to ________ and output to ________,everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Q2) Everything else held constant,a monetary expansion is characterized by ________ output and ________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
Q3) The less interest-sensitive is money demand,the
A) more effective is fiscal policy relative to monetary policy.
B) more effective is monetary policy relative to fiscal policy.
C) steeper is the IS curve.
D) flatter is the LM curve.
Q4) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.
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