Econ 102 Exam 2 Name ID Section Number

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1 Econ 102 Exam 2 Name ID Section Number 1. In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result: A) private savings were equal to $20 billion. B) private savings were equal to $10 billion. C) the government's budget balance was equal to a surplus of $10 billion. D) net savings were equal to $0. 2. An increase in the expected future disposable income of households: A) increases the slope of the aggregate spending line. B) decreases the slope of the aggregate spending line. C) shifts up the planned aggregate spending line. D) shifts down the planned aggregate spending line. 3. The absolute inventory of new homes in August, but in a relative measure due to rising flows relative to stocks. A) reported no change, rose B) reported no change, fell C) fell, rose D) rose, fell 4. Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect: A) a short-run increase in real GDP and the price level, and a long-run increase in real GDP and a decrease in the price level. B) a short-run increase in real GDP and the price level, and a long-run decrease in real GDP and a decrease in the price level. C) a short-run increase in real GDP and the price level, and a long-run decrease in real GDP and an increase in the price level. D) a short-run increase in real GDP and the price level, and a long-run increase in real GDP and an increase in the price level. Version 3 Page 1

2 5. All other things unchanged, a general increase in the amount of government borrowing will typically: A) shift the loanable funds demand curve to the right and increase interest rates. B) shift the loanable funds demand curve to the left and decrease interest rates. C) have no effect on the loanable funds demand curve. D) have no effect on the demand for loanable funds. 6. Implicit liabilities refer to the promises made by the government, such as: A) aid to foreign countries. B) contributions to the National Endowment for the Arts. C) Social Security and Medicare payments. D) building roads and bridges. 7. Which of the following does not describe the current situation of the U.S. current account balance? A) The U.S. is borrowing $1.1 billion per day from the rest of the world. B) Trade deficit is greater than capital surplus. C) U.S. consumption is greater than U.S. production. D) Net exports have been negative for the last 23 years. 8. The effect of a government deficit on the economy is: A) neutral. B) biased. C) expansionary. D) contractionary. 9. When the government decides to increase taxes in order to fight an inflationary gap, it is: A) an example of discretionary fiscal policy. B) an example of an automatic stabilizer. C) likely to dampen the effects of inflation but will not lead to a correction. D) most likely to increase the size of the budget deficit. Version 3 Page 2

3 10. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then, in the long run, one will find: A) nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level. B) nominal wages will fall and the SRAS curve will shift right bringing the economy back to its potential real GDP. C) nominal wages will fall shifting the AD curve to the left and bringing the economy back to its potential real GDP. D) nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP. 11. Which of the following is not a factor leading to a surge in non-revolving consumer credit? A) Low interest rates. B) Rising unemployment rate. C) Rising homes and stock prices. D) Pent-up demand for auto loans. 12. The Purchasing Managers Index is calculated by adding one half of the percent reporting to the percent reporting. A) increasing, decreasing B) decreasing, no change C) decreasing, no change D) no change, increasing 13. Suppose a lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate is equal to: A) 12%. B) 9%. C) 3%. D) 6%. 14. The multiplier process assumes that: A) the economy is open and there is free trade. B) interest rates are constantly changing. C) aggregate prices are perfectly flexible. D) the economy is operating with sticky aggregate price levels. Version 3 Page 3

4 15. If the economy experiences a decrease in consumer spending it was most likely caused by: A) an expected increase in personal income taxes in the future. B) an increase in investment spending. C) an increase in the multiplier. D) an expected decrease in personal income taxes in the future. 16. Business investment spending is accelerating in the U.S. because of all the following except: A) Firms are investing for additional capacity. B) Rising oil production. C) Rising interest rates. D) Rising housing starts. 17. States that are required by their constitution to have annually balanced budgets are likely to: A) have less severe business cycles than those not required to balance their budget. B) have more severe business cycles than those not required to balance their budget. C) have a better quality of life than those not required to balance their budget. D) grow faster than those not required to balance their budget. 18. If the economy is in a recessionary gap, then: A) AD will shift to the right and prices of goods will rise until the economy goes back to producing potential output. B) nominal wages will fall and SRAS will shift to the right until the economy is at full employment. C) the economy will remain in a recession forever without any kind of government intervention. D) nominal wages will rise and SRAS will shift to the left and the economy will eventually restore itself. 19. When the economy is in income expenditure equilibrium: A) real GDP equals planned aggregate spending. B) saving is less than investment spending. C) taxes equal transfer payments. D) exports equal imports. Version 3 Page 4

5 20. Empirical evidence shows that when the unemployment rate is below the deficit-to-gdp ratio is below. A) 9%, 5% B) 5%, 4% C) 5%, 2% D) 6%, 3% 21. If in an open economy, a country imports more than it exports and the government budget deficit increases: A) interest rates will increase and the amount of borrowing will increase. B) interest rates will increase, but the change in borrowing is ambiguous. C) interest rates will decrease and the amount of borrowing will increase. D) the change in interest rates is ambiguous, but the amount of borrowing will increase. 22. If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume is equal to: A) 9. B) 20. C) 0.8. D) A fall in the market interest rate makes any investment project: A) less profitable if the funds were borrowed and more profitable if it came from retained earnings. B) more profitable only if the funds were borrowed. C) more profitable whether the funds were borrowed or came from retained earnings. D) less profitable whether the funds were borrowed or came from retained earnings. 24. An unexpected decrease in consumer spending will change: A) unplanned investment spending. B) planned investment spending. C) both planned and unplanned investment spending D) neither planned nor unplanned investment spending. Version 3 Page 5

6 25. If interest rates increase, making bonds more attractive, the demand for stock will, and the price of stock will. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease 26. Alice's disposable income increases by $1,000, and she spends $600 of it. Alice's: A) MPC is 0.4 and she saves $400. B) MPS is 0.4 and she saves $400. C) MPS is 0.4 and she saves $600. D) MPC is 0.6 and she consumes $ Positive unplanned inventory investment occurs when: A) actual sales are less than expected sales. B) actual sales are higher than expected sales. C) actual depreciation is less than expected depreciation. D) actual depreciation is more than expected depreciation. 28. If a one-year project costs $100,000 and is expected to return the firm $105,000, the rate of return of the project is: A) $105,000. B) $5,000. C) 4.8%. D) 5%. 29. Suppose that the marginal propensity to consume is 0.8, and investment spending increases by $100 billion. The increase in aggregate demand is: A) $100 billion, the same amount as investment spending. B) $500 billion, composed of $100 billion in investment spending and $400 billion in consumption. C) $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion. D) $125 billion, composed of $100 billion in investment spending and $25 billion in consumption. Version 3 Page 6

7 30. Starting from its potential output, an economy's government increases spending. In the long run, this economy: A) will produce at its potential output level, but at a lower aggregate price level. B) will produce at an output level that is below its potential output. C) will produce at an output level that is greater than its potential output. D) will produce at its potential output. 31. A downward shift in the consumption function can be caused by: A) expectations of higher permanent income. B) a decrease in disposable income. C) a decrease in wealth. D) an increase in disposable income. 32. If the aggregate consumption equals $100 million YD, then the marginal propensity to consume is: A) B) C) $75 million. D) $100 million. 33. If the tax rate is 0.1 and the MPC is 0.5: A) the multiplier is equal to 2. B) the multiplier is equal to 2.1. C) the multiplier is equal to 1.8. D) the multiplier is equal to The government can increase savings by: A) taxing more than it spends. B) increasing inflation. C) spending more than it taxes. D) increasing the deficit. 35. If Mega Corp. borrows $9,000 and agrees to pay the lender $10,500 in one year, the annual interest rate on this loan is approximately: A) 14.3%. B) 16.7%. C) There is not enough information given to determine the rate. D) 8.6%. Version 3 Page 7

8 36. Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by: A) $200 billion. B) $40 billion. C) $80 billion. D) $100 billion. 37. If an economy is operating at a real GDP level that is below its potential real GDP, one will find: A) relatively high unemployment levels. B) nominal wages moving upwards as the economy moves from the short run to the long run. C) no change in price levels. D) the SRAS curve shifting left as the economy corrects itself from the short run to the long run. 38. If the multiplier is 4 and investment spending falls by $100 billion, the change in equilibrium income will be: A) $400 billion. B) $25 billion. C) $25 billion. D) $400 billion. 39. Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is rising. Which of the following most likely caused these changes? A) an increase in aggregate supply B) a decrease in aggregate demand C) a decrease in aggregate supply D) an increase in aggregate demand 40. If the aggregate price level falls, this will cause, holding everything else constant, the planned expenditure curve to: A) shift downwards. B) turn horizontal. C) shift upwards. D) slope downwards. Version 3 Page 8

9 Answer Key 1. A 2. C 3. D 4. C 5. A 6. C 7. B 8. C 9. A 10. D 11. B 12. D 13. B 14. D 15. A 16. C 17. B 18. B 19. A 20. D 21. D 22. C 23. C 24. A 25. A 26. B 27. A 28. D 29. B 30. D 31. C 32. B 33. C 34. A 35. B 36. D 37. A 38. D 39. D 40. C Version 3 Page 9