Ryerson University Department of Economics ECN 204 MidtermTwo W12. Name: Student No:

Transcription

1 Ryerson University Department of Economics ECN 204 MidtermTwo W12 Instructor: Prof. T.Barbiero Duration: 50 Minutes Name: Student No: Choose the BEST answer and recorded it on both your scanner sheet and test paper. Use the following to answer questions 1-2: 1) The composite index of leading indicators turns downward for three consecutive months; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Parliament; (4) The tax cut is passed by Parliament; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. 1. Refer to the above information. The recognition lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and Refer to the above information. The operational lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and Refer to the above information. The administrative lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5. Page 1

2 4. Menu costs will: A) increase the amount of training of workers. B) result in price wars between businesses. C) increase the legal minimum wage. D) make prices inflexible downward. E) Both B and C are correct. 5. You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with the goal of achieving price level stability? A) increase government spending and taxes B) decrease government spending and taxes C) decrease government spending and increase taxes D) increase government spending and decrease taxes 6. The crowding-out effect is likely to be greater when the: A) economy is in a serious recession. B) government is incurring surpluses, rather than deficits. C) economy is at full employment. D) investment-demand curve is steep. E) both B and D are correct. 7. Built-in stabilizers: A) intensify the business cycle. B) reduce the size of the multiplier. C) increase the government's deficit during a recession. D) are a part of discretionary fiscal policy. E) lead to long-run growth. 8. The government should act quickly to eliminate an inflationary gap because, if it fails to do so: A) the higher prices would lead to a shift of short-run aggregate supply to the right. B) the higher price level would eventually lead to a shift of the short-run aggregate supply to the left, which would push the prices even to a higher level. C) the higher prices would shift the aggregate demand curve to the left and reduces the general price level. D) the aggregate demand and aggregate supply curves automatically increase and create higher general price level. E) Both A and C are correct. Page 2

3 Use the following to answer questions 9-10: The table shows the consumption schedule for a hypothetical economy. All figures are in billions of dollars. Real GDP C $600 $ Refer to the above table. If taxes were zero, government purchases of goods and services $10, planned investment $6, and net exports zero, equilibrium real GDP would be: A) $620. B) $630. C) $640. D) $650. E) $ Refer to the above table. If taxes were $5, government purchases of goods and services $10, planned investment $6, and net exports zero, equilibrium real GDP would be: A) $600. B) $610. C) $620. D) $630. E) $650. Use the following to answer questions 11-12: C = Y _ I g = I g = 40 _ X = X = 20 _ M = M = 30 Page 3

4 11. The equilibrium level of GDP (=Y ) in the above economy is: A) $200. B) $245. C) $320. D) $330. E) $ Refer to the above information. In equilibrium the level of saving is: A) $20. B) $30. C) $40. D) $50. E) $55. Use the following to answer questions 13-14: The letters Y, C, I g, X, and M stand for GDP, consumption, gross investment, exports, and imports respectively. Figures are in billions of dollars. C = Y I g = 60 X = 24 M = Refer to the above information. The multiplier for this economy: A) is 3.3 B) is 3. C) is 2. D) is E) Refer to the above information. If government desired to raise the equilibrium GDP to $650, it could: A) raise G by $45 and reduce T by $10. B) raise G by $40 and reduce T by $30. C) raise G by $30 or reduce T by $40. D) raise both G and T by $40. Page 4

5 15. If government adhered strictly to an annually balanced budget, the government's budget would: A) vary in a countercyclical fashion. B) tend to destabilize the economy. C) have no impact upon domestic output and employment. D) tend to stabilize the economy. E) both A and D are correct. 16. An increase in aggregate expenditures resulting from a decrease in the price level is equivalent to a(n): A) rightward shift of the aggregate demand curve. B) leftward shift of the aggregate demand curve. C) movement downward along a fixed aggregate demand curve. D) decrease in aggregate supply. E) decrease in aggregate supply. 17. You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment? A) increase government spending and taxes B) decrease government spending and taxes C) decrease government spending and increase taxes D) increase government spending and decrease taxes 18. The wealth, interest rate, and foreign trade effects all help explain: A) why the aggregate demand curve is downsloping. B) why the aggregate supply curve is upsloping. C) shifts in the aggregate demand curve. D) shifts in the aggregate supply curve. Page 5

6 Use the following to answer questions 19-23: The following information is for a closed economy: GDP C S Ig $100 $100 $ 0 $ Refer to the above information. If in addition to spending $80 billion at each level of GDP, government imposes a lump-sum tax of $100: A) equilibrium GDP will now be $350. B) equilibrium GDP will now be $400. C) equilibrium GDP will now be $300. D) equilibrium will now be $500. E) the equilibrium GDP cannot be determined. 20. Refer to the above information. If both government spending and taxes are zero, the equilibrium level of GDP: A) is $200. B) is $300. C) is $400. D) is $500. E) cannot be determined from the information given. 21. Refer to the above information. The introduction of $80 billion of government spending has: A) lowered the multiplier from 2.5 to 2.0. B) increased the multiplier from 2.5 to 3.0. C) increased the multiplier from 2.0 to 2.5. D) increased the multiplier from 2.5 to 3.0. E) had no effect on the size of the multiplier. Page 6

7 22. Refer to the above information. If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP: A) will rise to $700. B) will rise to $600. C) will rise to $500. D) will rise to $400. E) may either rise or fall. 23. Refer to the above information. The addition of a $100 billion lump-sum tax: A) reduces the MPC and increases the multiplier. B) increases the MPC and decreases the multiplier. C) increases both the MPC and the multiplier. D) increases the MPS and the multiplier. E) has no effect on either the MPC or the multiplier 24. Which one of the following would not shift the aggregate demand curve? A) a change in the price level B) depreciation of the international value of the dollar C) a decline in the interest rate at each possible price level D) an increase in personal income tax rates E) all of the above. 25. The open economy multiplier is: A) larger than the simple multiplier because the latter embodies fewer leakages. B) larger than the simple multiplier because the latter embodies more leakages. C) smaller than the simple multiplier because the latter embodies fewer leakages. D) smaller than the simple multiplier because the latter embodies more leakages. E) no different from the closed economy multiplier. 26. Which of the following statements is incorrect? A) Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. B) Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4. C) If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion. D) A government surplus is anti-inflationary; a government deficit is expansionary. E) None of the above. Page 7

8 27. The foreign trade effect: A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the aggregate supply curve rightward. D) shifts both the aggregate demand and aggregate supply. E) does none of the above. 28. Cost-push inflation is characterized by a(n): A) increase in aggregate supply and a decrease in aggregate demand. B) increase in aggregate demand and no change in aggregate supply. C) decrease in aggregate supply and no change in aggregate demand. D) decrease in both aggregate supply and aggregate demand. 29. The effects of a cyclically balanced budget are: A) procyclical. B) countercyclical. C) economically neutral. D) too small to be of any importance. E) both A and D are correct. 30. If the MPS in an economy is.4, government could shift the aggregate demand curve leftward by $50 billion at each price level by: A) reducing government expenditures by $125 billion. B) reducing government expenditures by $20 billion. C) increasing taxes by $50 billion. D) increasing taxes by $250 billion. 31. The long-run aggregate supply curve is vertical: A) because the rate of inflation is steady in the long run. B) because resource prices eventually catch up with product prices. C) because product prices always increase at a faster rate than resource prices. D) only when the money supply increases at the same rate as real GDP. E) all of the above. Page 8

9 Use the following to answer question 32: 32. If the full-employment GDP for the above economy is at L, the: A) actual budget will entail a deficit. B) cyclically adjusted budget will entail a deficit. C) actual budget will entail a surplus. D) cyclically adjusted budget will entail a surplus. E) both A and B are correct. Use the following to answer questions 33-35: The following information is for a private closed economy, where I g is gross investment, S is saving, and Y is gross domestic product (GDP). I g = I g = 80 S = Y 33. Refer to the above information. In equilibrium consumption will be: A) $400. B) $280. C) $320. D) $360. E) $ Refer to the above information. In equilibrium saving will be: A) $40. B) $120. C) $60. D) $70. E) $80. Page 9

10 35. Refer to the above information. The equilibrium GDP will be: A) $160. B) $400. C) $360. D) $480. E) $ The economy experiences an increase in the price level and a decrease in real domestic output. Which is a likely explanation? A) productivity has increased B) input prices have increased C) excess capacity has decreased D) government regulations have been reduced E) both C and D are correct. 37. The elimination of a recessionary gap without the help of a rightward shift of the aggregate demand: A) would take an unacceptably long period of time. B) would take 3-6 months. C) would happen immediately. D) would happen in a very short period of time. Page 10

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