Economics 1012N Introduction to Macroeconomics Spring 2005 Dr. R. E. Mueller Second Midterm Examination March 23, 2005

Transcription

1 Economics 1012N Introduction to Macroeconomics Spring 2005 Dr. R. E. Mueller Second Midterm Examination March 23, 2005 Answer all of the following questions by selecting the most appropriate answer on your bubble sheet. Be sure to read each question carefully. Each question is worth 2 points (100 points total) and will count as 20 per cent of your final course grade. NOTE: The use of calculators is prohibited. 1. In terms of the demand for money, the interest rate represents a. the price of borrowing money. b. the return on money that is saved for the future. c. the rate at which current consumption can be exchanged for future consumption. d. the opportunity cost of holding money. 2. Assume that there is no foreign trade or income tax and that the MPC is By increasing government spending by $400, equilibrium output ; and by increasing taxes by $400, equilibrium output. a. increases by $1600; decreases by $1600 b. increases by $1600; decreases by $1200 c. increases by $1200; decreases by $1600 d. increases by $400; decreases by $ As the interest rate increases, a. planned investment decreases, but aggregate expenditure remains constant. b. planned investment increases, but aggregate expenditure remains constant. c. planned investment decreases and aggregate expenditure decreases. d. planned investment increases and aggregate expenditure increases. 4. If taxes are $200 billion, the equilibrium level of output is $6000 billion. If taxes increase to $300 billion, everything else the same, the equilibrium level of output falls to $5500 billion. The value of the tax multiplier a. is b. is -5. c. is 5. d. cannot be determined from this information because the MPC is not given. 5. If the consumption function is above the 45 degree line, a. consumption is less than income and saving is positive. b. consumption is less than income and saving is negative. c. consumption exceeds income and saving is positive. d. consumption exceeds income and saving is negative. 6. Which of the following would lead to an increase in consumption spending? a. an increase in interest rates b. an increase in household income c. a decrease in household wealth d. news reports that indicate the economy is moving into a downturn Version 1 1

2 7. The main reason that people hold money to buy things is referred to as the a. speculation motive. b. precautionary motive. c. transactions motive. d. profit motive. 8. For the economy to be in equilibrium when there is no foreign trade in the economy, a. government spending must equal tax revenue and saving must equal investment. b. government spending must equal the sum of tax revenue, saving and investment. c. investment plus tax revenue must equal government spending plus saving. d. government spending plus investment must equal saving plus tax revenue. 9. Gresham's Law refers to the tendency a. for good money to drive out bad. b. for bad money to drive out good. c. for counterfeit money to drive out fiat money. d. for fiat money to drive out counterfeit money. 10. The multiple by which total deposits can increase for every dollar increase in reserves is the a. desired reserve ratio. b. bank's line of credit. c. deposit insurance limit. d. deposit multiplier. 11. If the interest rate increases, the aggregate savings and the aggregate consumption spending. a. increase; increases. b. increase; decreases. c. decrease; increases. d. decrease; decreases. 12. Assuming other things remaining constant, if the Bank of Canada bonds, money supply will and the interest rate will. a. buys; increase and fall b. buys; increase and rise c. sells; decrease and fall d. sells; increase and fall 13. What factor(s) is (are) assumed to be constant for a given money demand curve? a. only the interest rate b. only the level of aggregate output c. only the price level d. both the level of aggregate output and the price level 14. If consumption is $ when income is $21 000, and consumption increases to $ when income increases to $22 000, the MPS is a b c. Ý1. d. indeterminate from this information. 15. The development of money as a medium of exchange has facilitated the expansion of trade because a. holding money increases people's wealth. b. holding money increases people's income. c. no other mediums of exchange are available. d. money eliminates the "double coincidence of wants" problem. Version 1 2

3 16. Currency debasement occurs when a. the government requires that a certain form of money must be accepted in settlement of debts. b. the value of money falls as a result of a rapid increase in its supply. c. items are designated as money that are intrinsically worthless. d. items are used as money that also have intrinsic value in some other use. 17. The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion is a. fiscal drag. b. bracket creep. c. the Laffer curve. d. debt burden. 18. An item designated as money that is intrinsically worthless is a. fiat money. b. precious metals. c. barter items. d. commodity money. 19. The aggregate consumption function is C = Yd. If income is 1600 and net taxes are 100, consumption equals a b c d The motive for holding money that encourages investors to hold bonds when interest rates are low, with the hope of selling them when interest rates are high, is the a. precautionary motive. b. speculation motive. c. transactions motive. d. profit motive. 21. A bank has excess reserves to lend but is unable to find anyone to borrow the money. This will the size of the money multiplier. a. reduce b. increase c. have no effect on d. double Version 1 3

4 22. Net taxes are a. taxes paid by firms and households to the government minus the cost of collecting the taxes. b. taxes paid by firms and households to the government plus transfer payments made to firms and households. c. taxes paid by firms and households to the government minus the transfer payments made to households by the government. d. government expenditures minus government revenues. 23. Assume that the MPS is 0.2 and the savings increased by $40. Calculate the amount by which income increased. a. $40 b. $60 c. $100 d. $ A decrease in aggregate output causes the demand for money to and the interest rate to. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase 25. Which of the following represents an action by the Bank of Canada that is designed to increase the money supply? a. an increase in the Bank rate b. an increase in federal spending c. buying government securities in the open market d. a transfer of government funds from private banks to the Bank of Canada 26. Which of the following flow-chart sequences is true? a. rç Yç Iç net export ç AEç. b. rç Yè Iè net export ç AEè. c. rç AE è Yè Iè net export è. d. rç both I and net exp ort è AEè Yè. 27. The two links between the goods market and the money market are a. income and the interest rate. b. the interest rate and the unemployment rate. c. income and the inflation rate. d. the inflation rate and the unemployment rate. 28. 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 $50 billion. He tells you that the MPC in Vulcan is.8. Which of the following would be the best advice to give to the Vulcan President? a. Reduce government spending in Vulcan by $50 billion. b. Increase taxes in Vulcan by $50 billion. c. Reduce government spending in Vulcan by $10 billion. d. Increase taxes in Vulcan by $10 billion. Version 1 4

5 29. A deposit multiplier of 8 means that an increase in reserves of $1 could cause an increase in deposits of if there were no leakage out of the system. a. $.80 b. $1.00 c. $1.80 d. $ If the interest rate increases, a. bond price falls. b. bond price increases. c. bond values do not change. d. bond values may go up or down. 31. If planned investment does not fall when the interest rate rises, there will be a. no crowding-out effect. b. a substantial crowding-out effect. c. a slight crowding-out effect. d. a complete crowding-out effect. 32. If firms sharply increase the number of investment projects undertaken when interest rates fall and sharply reduce the number of investment projects undertaken when interest rates increase, then a. expansionary fiscal policy will be very effective. b. contractionary fiscal policy will be very effective. c. expansionary monetary policy will be very effective. d. contractionary monetary policy will not be effective. 33. Which of the following events will lead to a decrease in the equilibrium interest rate? a. an increase in the reserve ratio desired by private banks b. an increase in the price level c. a sale of government securities by the Bank of Canada d. a decrease in the level of aggregate output 34. Which of the following sequences best describes the crowding-out effect? a. Gç Yç rç Iè and net export è. b. Gç Yç M D ç r ç I è and net export è. c. Gç Yç M S ç r ç I ç and net export ç. d. Gç rè and I ç and net export ç. 35. Over which component of investment do firms have the least amount of control? a. purchases of new equipment b. construction of new factories c. inventory adjustment d. the buying and selling of stock 36. In macroeconomics, equilibrium is defined as that point at which a. saving equals consumption. b. planned aggregate expenditure equals consumption. c. planned aggregate expenditure equals aggregate output. d. aggregate output equals consumption minus investment. Version 1 5

6 37. Refer to Figure If planned investment increases as the interest rate falls, the planned investment schedule will be represented by Panel a. A. b. B. c. C. d. D. 38. Refer to Figure 9.8. The value for the multiplier in this example a. is.25. b. is 4. c. is 16. d. cannot be determined from this example. 39. Refer to Figure 9.8. If the aggregate expenditure function shifted from C + I to C + I', then a. autonomous consumption increased by $50 billion. b. planned investment increased by $50 billion. c. either autonomous consumption increased by $50 billion or planned investment increased by $50 billion. d. both autonomous consumption and planned investment increased by $50 billion. 40. d d Refer to Figure The money demand curve will shift from M 1 to M 2 if Version 1 6

7 a. the interest rate increases. b. the price level increases. c. bond values fall. d. aggregate income decreases. 41. s s Refer to Figure The money supply curve will shift from M0 to M1 if a. the reserve ratio desired by private banks increases. b. the Bank of Canada increases the discount rate. c. the equilibrium level of output increases. d. the Bank of Canada buys Canadian government securities in the open market. Version 1 7

8 42. Refer to Figure The crowding-out effect is represented by the movement from a. C + I + G to C + I' + G'. b. C + I + G to C + I + G'. c. C + I + G' to C + I + G. d. C + I + G' to C + I' + G'. 43. Refer to Figure An increase in government spending of $100 billion shifts the aggregate expenditure function from AE to AE'. This $100 billion increase in government spending causes the equilibrium level of output to increase by a. $133 billion. b. $267 billion. c. $400 billion. d. $417 billion. 44. Refer to Figure 9.1. This household's saving will be zero when income is a. $400. b. $800. c. $1000. d. $1800. Version 1 8

9 ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ (All figures in billions of dollars) Aggregate Aggregate Planned Output Consumption Investment ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ Figure Refer to Figure 9.6. At an aggregate output level of $400 billion, planned expenditure equals a. $400 billion. b. $450 billion. c. $500 billion. d. $850 billion. 46. Refer to Figure 9.6. At an aggregate output level of $200 billion, the unplanned inventory change is a. -$150 billion. b. -$100 billion. c. -$50 billion. d. $100 billion. Version 1 9

10 ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ ÄÄÄÄÄÄ MACRO MODEL Consider the following closed-economy macro model. Y = AE AE = C + I + G C = Yd Yd = Y - T T = 100 I = 200 G = 200 ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ ÄÄÄÄÄÄ 47. Refer to the Macro Model If G increases by 100, Y increases by a b c d Refer to the Macro Model If T decreases by 100, Y will increase by and the tax-multiplier will be. a. 500 and 4 b. 400 and 4 c. 500 and 5 d. 400 and 5 ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ The Balkan economy can be characterized by the following equations: ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ C = Yd G = 600 T = 500 I = 100 ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ Figure Refer to Figure At the equilibrium level of output in Balka, saving equals a b c d Refer to Figure At the equilibrium level of output in Balka, consumption equals a b c d Version 1 10

11 Economics 1012N - Spring Answer Key - Version 1 1. d 2. b 3. c 4. b 5. d 6. b 7. c 8. d 9. b 10. d 11. b 12. a 13. d 14. c 15. d 16. b 17. a 18. a 19. c 20. b 21. a 22. c 23. d 24. c 25. c 26. d 27. a 28. c 29. d 30. a 31. a 32. c 33. d 34. b 35. c 36. c 37. d 38. b 39. c 40. b 41. d 42. d 43. c 44. c 45. c 46. a 47. c 48. b 49. a 50. b Version 1 11