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1 Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Based on our understanding of the Keynesian cross, we know with certainty that an equal and simultaneous increase in G and T will cause A) an increase in investment. B) no change in output. C) a reduction in output. D) an increase in output. 1) 2) Which of the following occurs when disposable income is zero? A) saving must be zero B) consumption must be zero C) saving must be positive D) consumption is negative 2) 3) The IS curve will shift to the right when which of the following occurs? A) a reduction in the interest rate B) an increase in government spending C) an increase in the money supply 3) 4) Which of the following is a component of money? A) coins held by the nonbank public B) bills held by banks C) checkable deposits 4) 5) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. Given this information, we know that the interest rate on the bond is A) 10%. B) 90%. C) 9.5%. D) 110%. E) 5.3%. 5) 6) Consider an initial IS-LM equilibrium with normally-sloped curves. An increase in government spending takes us to a new equilibrium with income and interest rate. A) lower, an unchanged B) higher, a lower C) an unchanged, a higher D) an unchanged, a lower E) higher, a higher 6) 7) 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 output (Y). C) an increase in the interest rate (i). D) a reduction in i. 7) 1

2 8) The IS curve shifts to the left when. A) autonomous investment increases B) autonomous consumption increases C) taxes increase 8) 9) Which of the following is a characteristic of bonds? A) pay zero nominal interest B) are sold for a price that varies inversely with the interest rate C) can be used for transactions 9) 10) Suppose the consumption equation is represented by the following: C = YD. The simple expenditure multiplier in this economy is A) 1. B) 5. C).25. D).75. E) 4. 10) 11) When a closed economy is in equilibrium, we know with certainty that A) I = S + (G-T). B) I = S. C) I = S + (T-G). D) G = T and S = I. 11) 12) Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that A) the money market and goods market are in equilibrium and the bond market is not in equilibrium. B) the money, bond and goods markets are all in equilibrium. C) the money market and bond markets are in equilibrium and the goods market is not in equilibrium. D) neither the money, bond, nor goods markets are in equilibrium. E) the goods market is in equilibrium and the money market is not in equilibrium. 12) 13) For the U.S. economy, which of the following represents the largest component of GDP? A) exports B) investment C) government spending D) imports 13) 14) Suppose there is a simultaneous fiscal expansion and monetary contraction. We know with certainty that A) both output and the interest rate will increase. B) the interest rate will increase. C) the interest rate will decrease. D) output will increase. E) output will decrease. 14) 2

3 15) From any point below the current LM curve, money market equilibrium can be restored by some combination of a income and a interest rate that the demand for money. A) higher, higher, increases B) lower, higher, increases C) higher, lower, increases D) lower, higher, reduces E) higher, lower, reduces 15) Figure ) In Figure 4 5, the goods market is in equilibrium A) only at point E. B) at points A and E. C) at points A, B, E, and C. D) at points B, C, and E. E) at points E and D. 16) 3

4 IS Graph 2 17) On the graph above, if the economy is at point A when the real interest rate falls, the economyʹs new situation might be indicated by point. A) A B) B C) C D) D 17) 18) An increase in the money supply will cause an increase in which of the following variables? A) consumption B) investment C) output 18) 19) If C = YD, what increase in government spending must occur for equilibrium output to increase by 1000? A) 100 B) 200 C) 250 D) 1000 E) ) 20) Which of the following equals Aggrgate Expenditures in a closed economy? A) C + I + G + X B) C + I + G + IM - X C) C + I + G + X - IM D) none of the above 20) 21) A decrease in income. A) leads to a leftward shift of the money demand curve B) lowers money demand for any given interest rate C) lowers interest rates ceteris paribus 21) 22) The money supply is controlled by the A) stock of gold in the economy. B) President of the United States. C) Federal Reserve System. D) New York Stock Exchange. 22) 4

5 23) Which of the following generally occurs when a central bank pursues contractionary monetary policy? A) the central bank sells bonds and the interest rate increases. B) the central bank purchases bonds and the interest rate decreases. C) the central bank purchases bonds and the interest rate increases. D) the central bank sells bonds and the interest rate decreases. 23) 24) Which of the following best defines the LM curve? A) illustrates the effects of changes in i on investment B) illustrates the effects of changes in i on desired money holdings by individuals C) the combinations of i and Y that maintain equilibrium in financial markets D) the combinations of i and Y that maintain equilibrium in the goods market 24) 25) According to liquidity preference theory, as real income increases, so does. A) the supply of real money balances B) the demand for real money balances C) the real interest rate 25) 26) Suppose the consumption equation is represented by the following: C = YD, then private savings is A) YD. B) YD. C) YD. D) YD. 26) 27) If government spending and taxes decrease by the same amount, A) the IS curve shifts rightward. B) the LM curve shifts downward. C) the IS curve shift leftward. D) the IS curve does not shift. 27) 28) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action. A) investment spending will increase. B) investment spending may increase, decrease, or not change. C) there will be no change in investment spending. D) investment spending will decrease. 28) 29) As the nominal interest rate increases. A) it becomes more costly to hold bonds instead of money B) the quantity of money demanded rises C) the opportunity cost of holding money rises 29) 30) Which of the following is included in G? A) medicare B) government purchases C) interest payments on the government debt D) social security payments E) all of the above 30) 5

6 Answer Key Testname: ECON3312_EXAM2_REVIEW 1) D 2) E 3) B 4) D 5) E 6) E 7) B 8) C 9) B 10) E 11) C 12) C 13) E 14) B 15) D 16) B 17) B 18) D 19) A 20) D 21) D 22) C 23) A 24) C 25) B 26) D 27) C 28) B 29) C 30) B 6

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