MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 ECON 3312 Mcroeconomics Exam 2 Fall 2016 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If output is currently 1000 below full employment GDP and the marginal prpensity to save is 10%, how much does G need to change in order to restore full employment? A) B) C) 500. D) ) Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause A) a reduction in Y. B) an increase in the interest rate (i). C) an increase in output (Y). D) a reduction in i. 3) A decline in the money stock will A) shift the IS schedule downward and to the right B) shift the LM schedule to the left C) not have any effect on the LM schedule D) shift the LM schedule to the right 4) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift, the equilibrium level of aggregate output to fall, and the IS curve to shift to the, everything else held constant. A) down; right B) up; right C) up; left D) down; left 5) If Md = 3, r and Ms = 2,000, the MPC =.85, G=100, and T = 120, then the equilibrium interest rate is A) 10 B) 2.5 C) 5.0 D) 20 6) The traces out the points for which total quantity of goods produced equals total quantity of goods demanded. A) IS curve B) consumption function C) investment schedule D) LM curve 7) If the government reduces spending. A) consumption will increase B) the IS curve will shift to the right C) output will increase if interest rates remain fixed 8) Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy? A) Production equals demand. B) The money supply equals money demand. C) Financial markets are in equilibrium. D) The quantity supplied of bonds equals the quantity demanded of bonds. E) all of the above 1) 2) 3) 4) 5) 6) 7) 8) 1

2 9) As the nominal interest rate increases. A) the quantity of money demanded falls B) the opportunity cost of holding money rises C) it becomes more costly to hold money instead of bonds 10) If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will and the interest rate will. A) rise; rise B) fall; rise C) fall; fall D) rise; fall 11) When people are holding money in excess of their demand for real money balances. A) the central bank buys bonds to correct the imbalance B) the nominal interest rate will fall C) they increase their purchases of goods and services 12) A tax cut disposable income, consumption expenditure, and shifts the IS curve to the, everything else held constant. A) decreases; decreases; left B) increases; increases; right C) decreases; increases; left D) increases; decreases; right 13) The marginal propensity to consume represents A) the change in output caused by a one-unit change in autonomous demand. B) the ratio of total consumption to disposable income. C) the change in consumption caused by a one-unit change in disposable income. D) total income minus total taxes. E) the level of consumption that occurs if disposable income is zero. 14) If the consumption function is C = YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $25. B) $70. C) $50. D) $ ) The IS curve shows the combinations of output and the real interest rate for which A) the goods market is in equilibrium. B) the labor market is in equilibrium. C) the financial asset market is in equilibrium. D) an increase in output will cause the market-clearing interest rate to be bid up. 16) The money demand curve shifts to the right when A) income increases B) there is an increase in the riskiness of interest-bearing assets C) income decreases D) there is a decrease in the interest rate 17) An increase in the money supply would cause the IS curve to A) remain unchanged. B) shift up and to the right. C) shift up and to the right only if people face borrowing constraints. D) shift down and to the left. 9) 10) 11) 12) 13) 14) 15) 16) 17) 2

3 18) Consider the situation in which the opportunity cost of holding money balances is so low that transactions costs make buying bonds unprofitable. If the central bank conducts a helicopter drop what is the likely outcome? A) A decline in the interest rate. B) The new money balances will simply be held by economic agents. C) An increase in bond prices. D) An increase in investment spending by firms. 19) You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to A) shift down and to the right as the real money supply falls. B) shift up and to the left as the real money supply falls. C) shift down and to the right as the real money supply rises. D) shift up and to the left as the real money supply rises. 20) Assume the economy is in a liquidity trap. Which of the following are true? A) fiscal policy is less effective than outside the trap. B) none of the above. C) monetary policy is ineffective. D) monetary policy is very effective. 21) Suppose the demand for money is NOT very sensitive to the interest rate. Given this information, we know that A) the LM curve should be relatively flat. B) the IS curve should be relatively steep. C) the LM curve should be relatively steep. D) neither the IS nor the LM curve will be affected. E) the IS curve should be relatively flat. 22) Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the following to occur? A) the LM curve shifts and the economy moves along the IS curve. B) output will change causing a change in money demand and a shift of the LM curve. C) both the IS and LM curves shift. D) neither the IS nor the LM curve shifts. E) the IS curve shifts and the economy moves along the LM curve. 23) Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals A) 0.2. B) 0.6. C) 0.8. D) ) 19) 20) 21) 22) 23) 3

4 Figure ) In Figure 24-1, the economy moves from point 1 to point 2 whenever A) government spending increases. B) investment expenditures unrelated to the interest rate increase. C) the money supply increases. D) either A or B occurs. 25) In the Keynesian framework, as long as output is the equilibrium level, unplanned inventory investment will remain, firms will continue to lower production, and output will continue to fall. A) below; negative B) below; positive C) above; negative D) above; positive 26) Let C = (Y-T), planned investment equals 150, and T equals 200. If the equilibrium level of income is 2,000, then the level of government spending needed to make this true is A) 100 B) 210 C) 250 D) ) Suppose there is a simultaneous fiscal expansion and monetary expansion. We know with certainty that A) both output and the interest rate will increase. B) the interest rate will decrease. C) output will decrease. D) output will increase. E) the interest rate will increase. 28) In the classical model A) fiscal policy cannot influence output B) neither fiscal nor monetary policy can influence output C) both fiscal and monetary policy will have larger impacts on income D) none of the above 24) 25) 26) 27) 28) 4

5 29) The money demand curve will shift to the right when which of the following occurs? A) a reduction in the interest rate B) an increase in income C) an increase in the money supply 30) Economists define investment as the purchase of A) business spending on capital and household spending on durable goods. B) a new physical asset such as a new machine or a new house. C) any physical asset used by business to increase production and the repurchase of common stock. D) any physical asset, whether new or not, used by business to increase production. 31) A rise in the price of a bond causes the yield of the bond to A) rise. B) fall. C) rise if it's a short-term bond, fall if it's a long-term bond. D) remain unchanged. 32) The interest rate will increase as a result of which of the following events? A) an open market purchase of bonds by the central bank B) an increase in income C) a reduction in income 33) If the consumption function is given by C = (Y-T) and planned investment is 150, government spending is 50, and T is 100, then equilibrium income is A) 420 B) 300 C) 750 D) ) "Real money balances" refers to. A) the quantity of goods and services that money can buy B) gold and silver C) money that is actually available to be spent 35) In the Keynesian money market, velocity is A) independent of the interest rate B) positively related to the interest rate C) negatively related to the interest rate D) None of the above. 36) The IS curve shifts to the left when. A) taxes increase B) autonomous investment increases C) autonomous consumption increases 29) 30) 31) 32) 33) 34) 35) 36) 5

6 37) If aggregate output is above its equilibrium level. A) firms will tend to replenish their low inventories driving output up toward equilibrium B) there is an excess supply of goods C) actual output is below planned expenditure 38) Macroeconomic equilibrium requires. A) equilibrium in the money market B) equilibrium in both the goods and money markets C) equilibrium in neither the goods nor the money market D) equilibrium in the goods market 39) An increase in spending that results from expansionary policy causes the interest rate to, everything else held constant. A) incomes; fall B) fiscal; rise C) incomes; rise D) fiscal; fall 37) 38) 39) Situation 20-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, governmen expenditure equals $200, taxes equals $50, and the mpc equals ) Using the information in situation 20-2, if government increases their spending by $50 and increases taxes by 50, then equilibrium aggregate output will change by A) $100. B) $50. C) -$50. D) -$ ) IS Graph 2 41) On the graph above, a possible cause of the rightward shift of the IS curve is an increase in. A) the exchange rate B) interest rates C) money supply D) taxes 41) 6

7 42) If the marginal propensity to save is equal to 0.5 in the simple Keynesian model, then a 10-unit increase in government spending will cause output to rise by A)5 B)20 C)10 D)40 43) In the ISLM framework, an expansionary monetary policy causes aggregate output to and the interest rate to, everything else held constant. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease 44) Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bond's price must be A) $ B) $1150. C) $850. D) $ ) If the nominal interest rate is above the equilibrium level. A) issuance of bonds and other assets will cause the supply of real money balances to increase B) purchases of bonds and other assets will cause the interest rate to fall C) the opportunity cost of holding money is low, and is rising 46) Which of the following statements concerning Keynesian ISLM analysis is true? A) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. B) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. C) A fall in the money supply shifts the LM curve to the right. D) Expansionary fiscal policy will cause the interest rate to fall. 47) If aggregate demand falls short of current output, business firms will production to inventories. A) cut; build up B) cut; keep from accumulating C) expand; keep from accumulating D) expand; build up 48) According to liquidity preference theory, as real income increases, so does. A) the demand for real money balances B) the real interest rate C) the supply of real money balances 42) 43) 44) 45) 46) 47) 48) 7

8 49) 49) By referring to Figure above, an increase in the money stock A) leaves the LM curve unchanged at LM0 B) shifts the LM schedule to the right from LM0 to LM1 C) shifts neither the IS nor the LM schedule D) shifts the LM schedule to the left from LM0 to LM2 50) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess of/for goods which will cause aggregate output to. A) supply; fall B) supply; rise C) demand; rise D) demand; fall 50) 8

9 Answer Key Testname: ECON3312_EXAM2_FALL_2016 1) D 2) C 3) B 4) D 5) B 6) A 7) E 8) E 9) D 10) B 11) B 12) B 13) C 14) C 15) A 16) A 17) A 18) B 19) C 20) C 21) C 22) E 23) B 24) D 25) D 26) B 27) D 28) B 29) B 30) B 31) B 32) B 33) D 34) A 35) B 36) A 37) B 38) B 39) B 40) B 41) E 42) B 43) D 44) A 45) B 46) B 47) B 48) A 49) B 50) C 9