Part2 Multiple Choice Practice Qs

Part2 Multiple Choice Practice Qs 1. The Keynesian cross shows: A) determination of equilibrium income and the interest rate in the short run. B) determination of equilibrium income and the interest rate in the long run. C) equality of planned expenditure and income in the short run. D) equality of planned expenditure and income in the long run. 2. When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the: a. right with a slope greater than one. b. right with a slope less than one. c. left with a slope less than one. d. left with a slope greater than one. 3. According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income: A) income falls. B) planned expenditure falls. C) unplanned inventory investment is negative. D) prices rise. 4. According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by: A) one unit. B) G. C) G divided by the quantity one minus the marginal propensity to consume. D) G multiplied by the quantity one plus the marginal propensity to consume. 5. In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

6. In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250. 7. In the Keynesian-cross model, fiscal policy has a multiplier effect on income because fiscal policy: A) increases the amount of money in the economy. B) changes income, which changes consumption, which further changes income. C) is government spending and, therefore, more powerful than private spending. D) changes the interest rate. 8. The tax multiplier indicates how much change(s) in response to a $1 change in taxes. A) the budget deficit B) consumption C) real balances D) income 9. In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending? A) production. B) the interest rate. C) planned spending. D) the price level.

10. According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.7, and government expenditures and autonomous taxes are both increased by 150, equilibrium income will rise by: A) 0. B) 100. C) 150. D) 250. 11. If both investment and consumption (but not taxes) depend positively on Y, then the multiplier in the Keynesian cross model is: a. smaller than in the case where only consumption depends on Y. b. bigger than in the case where only consumption depends on Y. c. the same as in the case where only consumption depends on Y. d. may be bigger or may be smaller. 12. If both taxes and consumption (but not investment) depend on Y, then the multiplier in the Keynesian cross model is: a. smaller than in the case where only consumption depends on Y. b. bigger than in the case where only consumption depends on Y. c. the same as in the case where only consumption depends on Y. d. may be bigger or may be smaller. 13. If taxes and investment depend on Y as well as consumption, then the multiplier in the Keynesian cross model (is): a. smaller than in the case where only consumption depends on Y. b. bigger than in the case where only consumption depends on Y. c. the same as in the case where only consumption depends on Y. d. may be bigger or may be smaller.

14. In the Keynesian Cross model, if everyone attempts to save more, and there is no change in the government budget, then: a. total saving increases. b. total saving decreases. c. total saving does not change. d. total saving may increase or decrease. 15. In the Keynesian-cross model, a decrease in the interest rate planned investment spending and the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases 16. When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally: A) is vertical. B) is horizontal. C) slopes upward and to the right. D) slopes downward and to the right. 17. Most economists believe that prices are: a. flexible in the long run but many are sticky in the short run. b. flexible in the short run but many are sticky in the long run. c. sticky in both the short and long runs. d. flexible in both the short and long runs. 18. Along any given IS curve: A) tax rates are fixed, but government spending varies. B) government spending is fixed, but tax rates vary. C) both government spending and tax rates vary. D) both government spending and tax rates are fixed. 19. The IS curve shifts when all of the following economic variables change except: A) the interest rate. B) government spending. C) tax rates. D) the marginal propensity to consume.

20. If MPC = 0.75 (and there are no taxes that depend on Y), then when T increases by 100, the IS curve for any given interest rate shifts to the left by: a. 100 b. 200 c. 300 d. 400 21. An explanation for the slope of the IS curve is that as the interest rate decreases, the quantity of investment, and this shifts the expenditure function, thereby increasing income. a. increases; downward b. increases; upward c. decreases; upward d. decreases; downward 22. The IS curve represents combinations of Y and r that: a. are consistent with equilibrium in the money market. b. are consistent with equilibrium in the goods market. c. are positively related to each other. d. are consistent with an increasing level of government expenditure. 23. The IS curve is downward sloping because: a. A reduction in the real interest rate leads to more government expenditure and thus to higher Y. b. A reduction in the real interest rate leads to lower taxes and thus to higher Y. c. A reduction in the real interest rate leads to higher investment and possibly consumption spending which lead to higher Y. d. All of the above. 24. Shifts in the IS curve can result from: a. Changes in government expenditure. b. Changes in taxes. c. Changes in the exogenous components of consumption or investment. d. All of the above. 25. Fiscal policy consists of: a. Changes in taxes and government expenditure. b. Changes in the money supply. c. The central bank changing the interest rate. d. All of the above. 26. An increase in government spending is represented as a: a. leftward shift of the IS curve. b. rightward shift of the IS curve. c. leftward shift of the MP curve. d. rightward shift of the MP curve.

27. Economists use the term money to refer to: A) income. B) profits. C) assets used for transactions. D) earnings from labor. 28. People use money as a store of value when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem. 29. The central bank in the United States is the: A) Bank of America. B) U.S. Treasury. C) U.S. National Bank. D) Federal Reserve. 30. To reduce the money supply, the Federal Reserve: A) buys government bonds. B) sells government bonds. C) creates demand deposits. D) destroys demand deposits. 31. In the United States, the money supply is determined: A) only by the Fed. B) only by the behavior of individuals who hold money and of banks in which money is held. C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D) according to a constant-growth-rate rule. 32. The money supply consists of: A) currency plus reserves. B) currency plus the monetary base. C) currency plus demand deposits. D) the monetary base plus demand deposits. 33. Assets of banks include: A) money market mutual funds. B) currency in the hands of the public. C) loans to customers. D) demand deposits.

34. Liabilities of banks include: A) reserves. B) currency in the hands of the public. C) loans to customers. D) demand deposits. 35. In a system with 100-percent-reserve banking: A) all banks must hold reserves equal to 100 percent of their loans. B) no banks can make loans. C) the banking system completely controls the size of the money supply. D) no banks can accept deposits. Use the following to answer questions 41-43: Bank Balance Sheet Assets Liabilities & Net Worth Reserves $ 10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Capital 30,000 36. (Table: Bank Balance Sheet) Based on the table, what is the leverage ratio at the bank? A) 3 B) 4.67 C) 5 D) 10 37. (Table: Bank Balance Sheet) Based on the table, what is the reserve ratio at the bank? A) 3 percent B) 5 percent C) 10 percent D) 15 percent 38. (Table: Bank Balance Sheet) Based on the table, capital will fall to zero if loan defaults reduce the value of total assets by percent. A) 10 B) 20 C) 30 D) 40

39. The ratio of the money supply to the monetary base is called: A) the currency deposit ratio. B) the reserve deposit ratio. C) high-powered money. D) the money multiplier. 40. If the currency deposit ratio equals 0.5 and the reserve deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5. 41. If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect to increase. A) reserve requirements B) the discount rate C) the money supply D) the reserve deposit ratio 42. If the money supply increases 12 percent, velocity decreases 3 percent, and the price level increases 5 percent, then the change in real GDP must be percent. A) 3 B) 4 C) 9 D) 11 43. Most economists believe that prices are: a. flexible in the long run but many are sticky in the short run. b. flexible in the short run but many are sticky in the long run. c. sticky in both the short and long runs. d. flexible in both the short and long runs. 44. Money market equilibrium for a given level of the money supply is represented by the curve. a. IS b. MP c. LM d. IA 45. Money demand (for real money balances) is: a. positively related to the nominal interest rate and negatively related to income. b. positively related to both the nominal interest rate and income. c. negatively related to both the nominal interest rate and income. d. negatively related to the nominal interest rate and positively related to income.

46. Equilibrium in the money market occurs when: a. households and firms are happy with their allocation of assets between money and bonds at a given Y and r. b. money demand equals money supply. c. at a given money supply, there is no further tendency to shift from holding bonds to money. d. all of the above 47. Monetary policy is able to affect the real interest rate, because prices are: a. high b. completely flexible c. not completely flexible d. low 48. In the early 1990s, budget deficits were reduced, and the Fed acted to prevent a fall in output. We can represent these actions as: a. A leftward shift of the IS curve and a rightward shift of the LM curve. b. A leftward shift of both the IS and LM curves. c. A rightward shift of the IS curve and a leftward shift of the LM curve. d. A rightward shift of both the IS and LM curves. 49. The actions in Q. 55 above, under the assumption that investment is primarily dependent on the real interest rate, and consumption is primarily dependent on disposable income, would act to: a. increase consumption and decrease investment. b. increase both consumption and investment. c. decrease both consumption and investment. d. decrease consumption and increase investment. 50. A fall in consumer confidence, in the short-run, will result in: a. A rightward shift of the IS curve and a reduction in output. b. A rightward shift of the IS curve and an increase in output. c. A leftward shift of the IS curve and a decrease in output. d. A leftward shift of the IS curve and an increase in output. 51. When prices are sticky, an increase in the money supply causes: a. a reduction in the real interest rate and an increase in output. b. an increase in the real interest rate and a decrease in output. c. a reduction in the real interest rate and a decrease in output. d. no effect on the real interest rate or output.

52. The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: a. consumption function. b. interest rate. c. price level. d. nominal money supply. 53. The LM curve, in the usual case: A) is vertical. B) is horizontal. C) slopes down to the right. D) slopes up to the right. 54. An explanation for the slope of the LM curve is that as: A) the interest rate increases, income becomes higher. B) the interest rate increases, income becomes lower. C) income rises, money demand rises, and a higher interest rate is required. D) income rises, money demand rises, and a lower interest rate is required. 55. In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) in money. A) increase; supply B) increase; demand C) decrease; supply D) decrease; demand 56. In the IS-LM model when taxation increases, in short-run equilibrium, in the usual case, the interest rate and output. A) rises; falls B) rises; rises C) falls; rises D) falls; falls