ECNS Fall 2009 Practice Examination Opportunity

Transcription

1 ECNS Fall 2009 Practice Examination Opportunity Mark the answer on the provided scantron sheet using a #2 lead pencil. Erase completely. I am not responsible for poorly marked or poorly erased asnwers. Think like an economist! Good Luck! TOPICS FOR REVIEW 1) Introduction to Macroeconomics and Measuring Macroeconomics Variables -- Concepts of supply and demand -- Factors that shift supply -- Factors that shift demand -- Difference between shifts of the supply/demand curve versus movement along the curve -- Price ceilings and price floors -- effects on markets -- History of macroeconomics -- Three major goals of macroeconomic policy -- Business cycle -- Macroeconomics vocabulary -- inflation rate, price level, growth rate, unemployment rate, labor force -- Measuring aggregate output -- What is included/excluded in GDP? What is included in GNP? -- Calculating GDP -- Calculating nominal GDP and real GDP -- Fixed weight growth rate versus chain-weighted growth rate -- Calculating the labor force, unemployment rate -- Factors that are included in labor force, working-age population -- Four types of unemployment -- Accounting for inflation -- GDP deflator and CPI -- Calculating the inflation rate -- Converting prices into real terms -- Fisher equation -- REVIEW HOMEWORKS 1, 2, AND 3 -- REVIEW FIRST PRACTICE EXAM AND FIRST EXAM 1

2 2) Keynesian Economics Model -- Why and when did the Keynesian theory of economics come about? -- Explain why the Great Depression happened -- Formula for aggregate demand, Z -- Deriving consumption, C -- Deriving aggregate demand function and equilibrium output -- Factors that affect aggregate demand and output -- Fiscal policies that affect aggregate demand -- what shifts Z up or down? -- Keynesian Cross diagram -- Solving numerically for equilibrium -- Multiplier effect -- intuition and graphical representation -- Factors that can dampen the multiplier effect -- Government spending multiplier -- Taxation multiplier -- Reverse government spending multiplier / reverse taxation multiplier -- Three lags in fiscal policy -- Automatic stabilizers -- REVIEW HOMEWORKS 4, 5, AND 6 -- REVIEW PRACTICE EXAM 2 AND EXAM 2 3) Money market -- Definition and meanings of money -- Three functions of money -- Measuring money -- M1 and M2 -- Money supply -- M = CR + DD == M = CR + R/rrr -- Fractional banking system -- Money multiplier -- Functions of the Federal Reserve -- Three tools that the Fed can use to change the money supply -- Money supply and money demand curves -- What can shift money supply / money demand? What causes movement along money supply/demand curves? -- How can the interest rate change? -- The link between interest rates and investment -- Link between the money market and goods market (Keynesian marekt) -- Feedback effects -- REVIEW HOMEWORKS 7 AND 8 -- REVIEW PRACTICE EXAM 3 AND EXAM 3 2

3 4) IS-LM and AD-AS -- What does the IS curve represent? -- Factors that shift the IS curve / factors that cause movement along the IS curve -- What does the LM curve represent? -- Factors that shift the LM curve / factors that cause movement along the LM curve -- What do changes in the IS-LM diagram represent? -- Drawing the IS-LM diagram. -- What does the AD curve represent? -- Shifters of the AD curve -- What does the SRAS curve represent? -- Why does the SRAS curve have a unique shape? -- Shifters of the SRAS curve -- What does the LRAS curve represent and imply? -- Three goals of policy makers. -- Illustrating macroeconomic changes, fiscal and monetary policies using the AD -AS diagram -- REVIEW HOMEWORK 9 -- REVIEW PRATICE EXAM 4 3

4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Refer to the information provided in Figure 1 below to answer the questions that follow. Figure ) Refer to Figure 1. An expansionary fiscal policy shifts the curve to the. A) IS; left B) LM; right C) LM; left D) IS; right 2) Refer to Figure 1. Which policy mix would definitely increase the equilibrium interest rate? A) An expansionary fiscal policy and a contractionary monetary policy B) An expansionary monetary policy and an expansionary fiscal policy C) A contractionary monetary policy and a contractionary fiscal policy D) None of the above 3) Each point on the IS curve represents in the goods market for the given interest rate. A) the equilibrium point B) a positive relationship between the price level and aggregate output C) maximum investment D) minimum pricing 4) Fiscal policy affects the money market through its effect on A) money supply and money demand. B) money supply and income. C) income and money demand. D) income and money supply. 5) Monetary policy affects the goods market through its effect on A) income and planned investment. B) income and money demand. C) the interest rate and planned investment. D) the interest rate and money demand. 6) Which of the following sequence of events follows a rise in the discount rate? A) r I AE Y. B) r I AE Y. C) r I AE Y. D) r I AE Y. 4

5 7) Monetary policy can be effective only if A) the money supply reacts to changes in the interest rate. B) government spending reacts to changes in the interest rate. C) money demand reacts to changes in the interest rate. D) planned investment reacts to changes in the interest rate. 8) Which of the following sequence of events occurs in response to an expansionary fiscal policy? A) Aggregate output decreases, causing money demand to increase, causing interest rates to increase and planned investment to decrease. B) Aggregate output increases, causing money demand to increase, causing interest rates to increase and planned investment to decrease. C) Aggregate output decreases, causing money demand to decrease, causing the interest rate to decrease and planned investment to increase. D) Aggregate output decreases, causing the demand for money to increase, causing interest rates to increase and planned investment to increase. 9) Which of the following is the sequence of events following a contractionary monetary policy? A) Interest rates decrease planned investment decreases aggregate output decreases money demand decreases. B) Aggregate output falls the demand for money falls interest rates rises planned investment decreases. C) Interest rates increase planned investment decreases aggregate output decreases money demand decreases. D) Money demand increases interest rates increase planned investment falls and aggregate output falls. 10) Which of the following actions is an example of an expansionary monetary policy? A) A purchase of government securities in the open market B) An increase in the discount rate C) An increase in income tax rates D) A reduction in federal spending on education 11) You are a member of the Council of Economic Advisors, and you are concerned that the inflation rate is too high. Which of the following policies should you recommend? A) A decrease in the money supply B) An increase in government spending C) A decrease in income tax rates D) An increase in the money supply 12) The Federal Reserve has pursued strong contractionary policies twice in recent years: first in , and again in The Fedʹs purpose in following a tight monetary policy was to A) reduce the interest rate. B) slow the inflation rate. C) reduce the level of planned investment. D) reduce the government deficit. 13) The policy mix that would cause the interest rate to decrease and investment to increase, but have an indeterminate effect on aggregate output, is a mix of A) contractionary fiscal policy and contractionary monetary policy. B) expansionary fiscal policy and contractionary monetary policy. C) expansionary fiscal policy and expansionary monetary policy. D) contractionary fiscal policy and expansionary monetary policy. 5

6 14) In an economy, when the price level falls, consumers and firms buy more goods and services. This relationship is represented by the A) short-run aggregate supply curve. B) aggregate demand curve. C) aggregate expenditures curve. D) long-run aggregate supply curve. Refer to the information provided in Figure 2 below to answer the questions that follow. Figure ) Refer to Figure 2. If the money demand curve shifts from M d 0 to M d 1, A) planned investment will increase and aggregate output will increase. B) planned investment will increase and aggregate output will decrease. C) planned investment will decrease and aggregate output will decrease. D) planned investment will decrease and aggregate output will increase. 16) Which of the following sequence of events is TRUE? A) Y Md r B) P Md r C) Y Md r D) P Md r 17) Aggregate demand decreases when the price level rises because the higher price level A) causes the demand for money to increase, causing interest rates to rise. B) means that the prices of some goods fall relative to the prices of other goods. C) means that people can afford to buy more goods. D) causes the interest rate to fall. 18) The aggregate demand curve slopes downward because at higher price level A) the purchasing power of consumersʹ assets declines and consumption increases. B) the purchasing power of consumersʹ assets increases and consumption increases. C) the purchasing power of consumersʹ assets declines and consumption decreases. D) producers can get more for what they produce, and they increase production. 19) When the general price level rises, A) consumption falls as a result of the real wealth effect. B) investment rises as a result of the multiplier effect. C) investment rises as a result of the real wealth effect. D) consumption increases as a result of the multiplier effect. 6

7 20) A decrease in net taxes at a given price level leads to A) an increase in aggregate demand. B) a decrease in aggregate supply. C) no change in aggregate demand. D) a decrease in aggregate demand. 21) The aggregate demand curve increases if A) the Fed increases the required reserve ratio. B) the Fed buys government bonds. C) the Fed increase the discount rate. D) none of the above. Refer to the information provided in Figure 3 below to answer the questions that follow. Figure ) Refer to Figure 3. Suppose the economy is at Point A, an increase in the price level can cause a movement to Point A) C. B) D. C) E. D) B. 23) The quantity of output supplied at different price levels is represented by the A) aggregate expenditures curve. B) production function. C) aggregate supply curve. D) aggregate demand curve. 7

8 Refer to the information provided in Figure 13.3 below to answer the questions that follow. Figure ) Refer to Figure This economy reaches capacity at A) $1,200 billion. B) f$800 billion. C) an output level that is indeterminate from this information because aggregate demand is not given. D) $600 billion. 25) What determines the slope of the aggregate supply curve is A) how much more the economy can produce without any change in the price level. B) how fast the price of factors of production respond to changes in the price level. C) how fast the output level changes after a technological advance. D) None of the above 26) A decrease in the price level causes A) a left ward shift in the aggregate supply curve. B) a rightward shift in the aggregate supply curve. C) a movement along the aggregate supply curve. D) None of the above. 27) Coal is used as a source of energy in many manufacturing processes. Assume a long strike by coal miners reduced the supply of coal and increased the price of coal. This would cause A) the short-run aggregate supply curve to shift to the left. B) the short-run aggregate supply curve to become nearly vertical at all levels of output. C) the short-run aggregate supply curve to become flatter. D) the short-run aggregate supply curve to shift to the right. 8

9 Refer to the information provided in Figure 5 below to answer the questions that follow. Figure ) Refer to Figure 5. During the 1990s, many firms in the United States were investing in new capital. If the economy was originally at Point A, this would have caused a movement to Point A) E. B) C. C) B. D) D. 29) If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been A) on the very flat part of the short-run aggregate supply curve. B) on the very flat part of the short-run aggregate demand curve. C) on the very steep part of the short-run aggregate supply curve. D) on the very steep part of the short-run aggregate demand curve. 30) Economic policies are effective concerning output when A) the economy is not producing at capacity. B) the unemployment rate is at the natural rate. C) the economy is producing potential output. D) the aggregate supply curve is vertical. 31) A sustained increase in the overall price level is A) inflation. B) a recession. C) stagflation. D) a price index. 32) A decrease in inflationary expectations that causes firms to decrease their prices shifts the A) aggregate demand curve to the left. B) aggregate supply curve to the left. C) aggregate supply curve to the right. D) aggregate demand curve to the right. Refer to the information provided in Table 3.1 below to answer the questions that follow. Price per Pizza $ Table 3.1 Quantity Demanded (Pizzas per Month) 1, Quantity Supplied (Pizzas per Month ) Refer to Table 3.1. If the price per pizza is $12, there is a(n) A) excess supply of 300 units. B) excess demand of 100 units. C) market equilibrium. D) excess demand of 750 units. 9

10 34) A price ceiling is A) a maximum price set by government that sellers may charge for a good. B) the minimum price that consumers are willing to pay for a good. C) the difference between the initial equilibrium price and the equilibrium price after a decrease in supply. D) a minimum price set by government that sellers must charge for a good. 35) According to Classical models, the level of employment is determined primarily by A) the level of aggregate demand for goods and services. B) government taxation. C) prices and wages. D) government spending. 36) According to the Classical model, unemployment A) could not persist because wages would rise to eliminate the excess supply of labor. B) could be eliminated only through government intervention. C) could not persist because wages would fall to eliminate the excess supply of labor. D) could be eliminated through fiscal and monetary policies. 37) Which of the following is a good or service counted in GDP? A) A used tire you buy for your personal car. B) Tires Ford buys to put on a car. C) A new tire you buy for your personal car. D) All of the above 38) Discouraged workers are A) part of structural unemployment. B) part of the labor force. C) part of frictional unemployment. D) None of the above 39) If the inflation rate is smaller than the nominal interest rate, the real interest rate is A) negative. B) positive. C) zero. D) either positive or zero. 40) As the marginal propensity to consume increases, the multiplier will A) either increase or decrease depending on the size of the change in investment. B) remain constant. C) decrease. D) increase. 41) A decrease in the required reserve ratio A) will decrease the discount rate. B) will decrease the money supply. C) will not change the money supply. D) will increase the money supply. 42) In a business cycle, a trough represents the end of A) a peak B) an expansion. C) an inflation. D) a recession. 10

11 43) The President of Vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the marginal propensity to consume in Vulcan is.6 and the marginal tax rate is 0. Which of the following would be the best advice to give to the Vulcan president? A) Increase taxes in Vulcan by $10 billion. B) Increase taxes in Vulcan by $2.5 billion. C) Reduce government purchases in Vulcan by $10 billion. D) Reduce government purchases in Vulcan by $4 billion. 44) The main disadvantage of using money as a store of value is that A) the value of money actually falls when the prices of goods and services rise. B) it requires a double coincidence of wants. C) currency is intrinsically worthless. D) money is not portable. 45) Nominal GDP measures the value of all goods and services A) in current dollars. B) in fixed dollars. C) in constant dollars. D) without inflation. Refer to the information provided in Table 6.8 below to answer the questions that follow. Table 6.8 Year 1 Production Year 2 Year 3 Year 1 Prices Year 2 Year 3 Good X $1.00 $1.00 $1.20 Good Y $0.60 $0.75 $ ) Refer to Table 6.8. Assume that this economy produces only two goods Good X and Good Y. The value for this economyʹs nominal GDP in year 3 A) is $250. B) is $240. C) is $260. D) cannot be determined from this information. 47) The CPI in period 1 is 200 and the CPI in period 2 is 100. The rate of inflation between period 1 and period 2 is A) -100%. B) -50%. C) -60%. D) 33.33%. 48) If the labor force is 260,000 and the total population 16 years of age or older is 300,000, the labor -force participation rate is A) 79.5%. B) 80.9%. C) 83.3%. D) 86.7%. 49) Real GDP is gross domestic product measured A) at a constant output level but at current prices. B) in the prices of a base year. C) as the difference between the current yearʹs GDP and last yearʹs GDP. D) in current dollars. 50) In which of the following conditions is the inflation rate likely to fall and the unemployment rate likely to rise? A) Hyperinflation B) Boom C) Stagflation D) Recession 11

12 Figure 6 51) Refer to Figure 6. Which of the points in the above graph are possible long-run equilibria? A) A and D B) A and C C) B and D D) A and B 12

13 FREE RESPONSE. 1) Using the IS-LM, illustrate the following scenarios and discuss the overall change in output and interest rate: a) A reduction in the corporate tax rate, which increases private investment. b) The rate of inflation rises. c) An influx of working-age immigrants leads to a rise in the labor supply. 2) Draw a basic AD-SRAS-LRAS diagram. Analyze the following: a) Assume that there is an increase in aggregate demand. Show the resulting short -run equilibrium. Explain how the economy adjusts back to the long-run equilibrium. b) Assume there is an unexpected increase in the price of an important raw material. Show the resulting short-run equilibrium. Explain how the economy adjusts back to the long-run equilibrium. 3) Using the AD-SRAS-LRAS diagram, illustrate the following situations. Assume that input prices fully adjust to output prices after some lag -- illustrate and discuss the long-run implications (how does economy return to long-run equilibrium?). Discuss what is the final outcome for output, interest rates, and prices: a) A tax cut holding government purchases constant with the economy operating at near full capacity. b) An increase in the price of oil caused by a war in the Middle East, assuming the Fed attempts to keep interest rates constant by accomodating inflation. c) An increase in the money supply. d) The federal government decrease government spending and the Federal Reserve buys U.S. T -bills. 4) Year Actual real GDP Potential GDP Unemployment Rate 1969 $4.26 trillion $4.19 trillion 3.5% 1970 $4.27 trillion $4.34 trillion 4.9% Typically, the LRAS is a measure of an economyʹs potential GDP, while the intersection of the AD and SRAS indicates the economies actual GDP. Using this information, answer and illustrate the following using an AD-SRAS-LRAS diagram: a) In 1969, actual real GDP was greater than potential GDP. Explainand illustrate how this is possible. b) Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased. Why did this increase in the unemployment occur? c) Was the inflation rate in 1970 higher or lower than the inflation rate in 1969? 13