Econ 102 Exam 2 Name ID Section Number

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1 Econ 102 Exam 2 Name ID Section Number 1. Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The investment multiplier is: A) 10. B) 4. C) D) If you are paid $10,500 in one year on a $10,000 loan made today, then your annual interest rate is: A) 5%. B) $10,000. C) 0%. D) $ The Federal Reserve, the central bank of the United States, has been cutting the interest rate in order to stimulate the recessionary economy. Interest cuts by the Federal Reserve are supposed to: A) increase cash holding by the general public thus lowering their dependence on credit. B) increase investment spending and thus increase GDP via the multiplier. C) increase government spending on the economic infrastructure and thus increase GDP through the multiplier process. D) lower the savings rate in the economy and stop leakages. 4. According to the accelerator principle, a rate of growth in real GDP leads to. A) lower; higher inventory investment B) higher; higher planned investment spending C) lower; lower unplanned inventory investment D) higher; higher inventory investment Version 1 Page 1

2 5. The supply of loanable funds increases when people decide to be thriftier. Which of the following is most likely to occur? A) Interest rates decrease, and investment spending increases. B) Interest rates decrease, and investment spending decreases. C) Interest rates increase, and investment spending decreases. D) Interest rates increase, and investment spending increases. 6. Which of the following is NOT a factor affecting the demand for single-family housing starts? A) rising jobs B) low mortgage interest rates C) rising household formations D) falling inflation 7. To close a recessionary gap by employing fiscal policy, the government could: A) lower the corporate income tax rate. B) increase national savings so that the interest rate falls. C) lower the amount of unemployment insurance benefits. D) lower the annual income exempt from paying the personal income tax. 8. Higher rates of interest tend to the quantity of loanable funds demanded, and lower rates of interest tend to it. A) reduce; reduce B) increase; increase C) reduce; increase D) increase; reduce 9. 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) $5,000. B) $105,000. C) 5%. D) 4.8%. 10. If the slope of the aggregate expenditures curve = 0.9, the multiplier is equal to: A) 5. B) 1. C) 10. D) 4. Version 1 Page 2

3 11. The the, the the multiplier. A) bigger; MPC; smaller B) bigger; MPC; bigger C) bigger; MPS; bigger D) smaller; level of wealth; bigger 12. Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: A) decrease taxes. B) decrease government transfers. C) increase real interest rates. D) decrease government purchases. 13. Currently there are only 4.6 month s supply of new homes on the market. If the inventory of homes was 235,000, what was the annual sales rate? A) 727,000 B) 609,000 C) 899,000 D) 433,000 Use the following to answer questions 14-17: Scenario: Open Economy S = I In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. 14. (Scenario: Open Economy S = I) How much is the net capital inflow? A) $4 trillion B) $1 trillion C) $2 trillion D) $3 trillion 15. (Scenario: Open Economy S = I) How much is private saving? A) $1.5 trillion B) $3.5 trillion C) $4 trillion D) $2.5 trillion Version 1 Page 3

4 16. (Scenario: Open Economy S = I) What is the government budget balance? A) a deficit of $0.5 trillion B) a surplus of $1.5 trillion C) a surplus of $3.5 trillion D) a deficit of $1.5 trillion 17. (Scenario: Open Economy S = I) How much is national saving? A) $3.5 trillion B) $5.5 trillion C) $4 trillion D) $2 trillion 18. Which one of the following will increase the aggregate consumption function? A) A decrease in aggregate wealth. B) An increase in aggregate wealth. C) A decrease in expected future disposable income. D) An increase in aggregate disposable income. 19. All other things unchanged, a general increase in the amount of government borrowing will typically: A) have no effect on the demand for loanable funds. B) shift the loanable funds demand curve to the left and decrease interest rates. C) shift the loanable funds demand curve to the right and increase interest rates. D) have no effect on the loanable funds demand curve. 20. When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the effect and is a reason why the curve slopes. A) interest rate; investment demand; downward B) interest rate; aggregate demand; downward C) wealth; short-run aggregate supply; upward D) wealth; aggregate demand; downward 21. Which of the following is NOT a determinate of consumer spending? A) expected future disposable income B) wealth C) investment spending D) current disposable income Version 1 Page 4

5 22. The marginal propensity to consume is 0.5, aggregate autonomous consumption is $10,000, and aggregate disposable income is $40,000. If disposable income is expected to increase in the future, the aggregate consumption function might take the form of: A) C = 10,000 + (42, ). B) C = 10,000 + (40, ). C) C = 10,000 + (40, ). D) C = 12,000 + (40, ). 23. Negative inventory investment occurs when companies: A) reduce their inventories by decreasing production. B) add to their inventories because sales fall. C) reduce their inventories because sales increase. D) add to their inventories by increasing production. 24. An amount that would equal a particular future value if deposited today at the prevailing interest rate is the: A) inflation rate. B) discount premium. C) market index. D) present value. Use the following to answer question 25: Figure: Shift of the Aggregate Demand Curve Version 1 Page 5

6 25. (Figure: Shift of the Aggregate Demand Curve) A movement from point A on AD1 to point C on AD2 could have resulted from a(n): A) increase in the total quantity of consumer goods and services demanded at every price level. B) lower price level. C) significant decrease in the income level of consumers. D) higher price level. 26. Government purchases of goods and services differ from changes in taxes and transfer payments because government purchases of goods and services: A) influences aggregate demand directly while changes in taxes and transfer payments influence aggregate demand indirectly. B) is a type of fiscal policy while changes in taxes and transfer payments is a type of monetary policy. C) influences aggregate demand indirectly while changes in taxes and transfer payments influence aggregate demand directly. D) is a type of monetary policy while changes in taxes and transfer payments is a type of fiscal policy. 27. If the aggregate consumption equals $100 million YD, then the marginal propensity to consume is: A) $100 million. B) C) D) $75 million. Version 1 Page 6

7 Use the following to answer question 28: Figure: Aggregate Expenditures and Real GDP 28. (Figure: Aggregate Expenditures and Real GDP) At a real GDP of $9,000 billion: A) there will be no unplanned investment. B) planned investment is less than investment. C) planned investment equals investment. D) planned investment is greater than investment. 29. Financial intermediaries that manage a stock portfolio and sell shares of the stock portfolio itself to individual investors are: A) pension funds. B) banks. C) mutual funds. D) life insurance companies. 30. Which of the following is NOT one of the components of the current account? A) balance on primary income B) balance on secondary income C) capital account D) balance on goods / services Version 1 Page 7

8 31. Actual investment spending equals: A) planned investment minus unplanned investment. B) unplanned investment, even if there is a positive amount of planned investment. C) unplanned investment minus planned investment. D) planned investment plus unplanned investment. 32. Which of all the following terms is common to both sides of the Treasury budget constraint and the Federal Reserve budget constraint? A) government spending B) high-powered money C) receipts from Central Bank D) taxes 33. The marginal propensity to consume (MPC) is equal to the change in: A) consumer spending divided by the change in gross domestic product. B) consumer spending divided by the change in disposable income. C) disposable income divided by the change in consumer spending. D) consumer spending divided by the change in investment spending. 34. National savings in a closed economy is all of the following EXCEPT: A) the total savings generated within the economy. B) GDP C G. C) government spending minus consumption. D) the sum of private savings plus the government budget balance. 35. Suppose the government increases spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will: A) increase by $600 billion. B) decrease by $400 billion. C) increase by $250 billion. D) decrease by $250 billion. 36. Consumer credit rose $26 billion in August due mostly to $20 billion increase in non-revolving credit. Which of the following is not considered a non-revolving credit type loan? A) student loan B) credit card loan C) new auto loan D) used-auto loan Version 1 Page 8

9 37. During the Great Depression, the United States experienced a the short-run aggregate supply curve; during the 1979 oil crisis, the United States experienced a in the short-run aggregate supply curve. A) movement up along; a rightward shift B) movement down along; a rightward shift C) movement up along; a leftward shift D) movement down along; a leftward shift 38. If households increase savings in their bank accounts, and the interest rate, therefore increasing investment spending. A) the demand of loanable funds shifts right; rises B) the demand of loanable funds shifts left; falls C) the supply of loanable funds shifts right; rises D) the supply of loanable funds shifts right; falls 39. The long-run aggregate supply curve is vertical because in the long run: A) all factors of production increase. B) the price of labor is flexible, while the price of physical capital is fixed. C) all prices are flexible. D) technological progress outpaces raises in nominal wages. 40. When David has no income, he spends $500. If his income increases to $2,000, he spends $1,900. Which of the following represents his consumption function? A) C = $ ,000 YD. B) C = 1.2 YD. C) C = 0.95 YD. D) C = $ YD. 41. If there is an inflationary gap in the economy, discretionary fiscal policy will likely involve action to: A) leave aggregate demand alone. B) shift both aggregate demand and aggregate supply the left. C) shift aggregate demand to the right. D) shift aggregate demand to the left. Version 1 Page 9

10 42. The life-cycle hypothesis of consumer spending says that consumers plan their spending: A) based on interest rates. B) according to fluctuations in the stock market. C) based only on current disposable income. D) over their lifetime. 43. Potential output: A) is greater in periods of expansion than in recessions. B) is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. C) varies with the price level. D) is dependent on the level of consumer confidence. 44. The value of all accumulated savings of a household is called: A) wages. B) debt. C) wealth. D) income. 45. Income expenditure equilibrium occurs when: A) GDP is equal to unplanned aggregate expenditure. B) consumption and investment are equal. C) GDP is equal to actual aggregate spending. D) GDP is equal to planned aggregate spending. 46. All of the following scenarios are associated with government budget deficits EXCEPT: A) Private investment spending is crowded out. B) The government becomes a borrower in the market for loanable funds. C) The interest rate rises. D) The total amount of borrowing decreases. 47. The Purchasing Managers Index rose to 51.5 in September due to all the following except: A) rising oil prices B) the end of the inventory correction cycle C) growing global economy D) falling value of the dollar Version 1 Page 10

11 48. According to the long-run aggregate supply curve, when, the quantity of aggregate output supplied. A) the price of commodities falls; rises B) the aggregate price level rises; falls C) nominal wages rise; falls D) the aggregate price level rises; does not change 49. Factory new orders fell 1.6% over the last year because of all the following factors except: A) stronger U.S. dollar B) falling energy prices C) rising inflation D) weak global demand 50. Rising inventories typically indicate unplanned inventory investment and a economy. A) negative; expanding B) positive; expanding C) positive; slowing D) negative; slowing Version 1 Page 11

12 Answer Key 1. B 2. A 3. B 4. B 5. A 6. D 7. A 8. C 9. C 10. C 11. B 12. A 13. B 14. C 15. B 16. D 17. D 18. B 19. C 20. D 21. C 22. D 23. C 24. D 25. A 26. A 27. B 28. B 29. C 30. C 31. D 32. C 33. B 34. C 35. C 36. B 37. D 38. D 39. C 40. D 41. D 42. D 43. B 44. C Version 1 Page 12

13 45. D 46. D 47. D 48. D 49. C 50. C Version 1 Page 13

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