ECON 3312 Mcroeconomics Exam 2 Fall 2014 Prof. Crowder

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1 ECON 3312 Mcroeconomics Exam 2 Fall 2014 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When people are holding money in excess of their demand for real money balances. A) the nominal interest rate will fall B) the central bank buys bonds to correct the imbalance C) they increase their purchases of goods and services 1) Situation 20-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals ) Using the information in situation 20-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by A) -$100. B) -$50. C) $50. D) $100. 2) Figure ) In Figure 24-1, the economy moves from point 1 to point 2 whenever A) investment expenditures unrelated to the interest rate increase. B) government spending increases. C) the money supply increases. D) either A or B occurs. 3) 1

2 4) Suppose the demand for money is NOT very sensitive to the interest rate. Given this information, we know that A) the IS curve should be relatively steep. B) neither the IS nor the LM curve will be affected. C) the LM curve should be relatively flat. D) the IS curve should be relatively flat. E) the LM curve should be relatively steep. 4) 5) 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 i. B) a reduction in Y. C) an increase in the interest rate (i). D) an increase in output (Y). 5) 6) An increase in spending that results from expansionary policy causes the interest rate to, everything else held constant. A) incomes; rise B) incomes; fall C) fiscal; fall D) fiscal; rise 6) 7) The IS curve shows the combinations of output and the real interest rate for which A) the goods market is in equilibrium. B) the financial asset market is in equilibrium. C) the labor market is in equilibrium. D) an increase in output will cause the market-clearing interest rate to be bid up. 7) 8) A rise in the price of a bond causes the yield of the bond to A) fall. B) rise. C) rise if itʹs a short-term bond, fall if itʹs a long-term bond. D) remain unchanged. 8) 9) 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; positive B) above; negative C) above; positive D) below; negative 9) 10) Suppose there is a simultaneous fiscal expansion and monetary expansion. We know with certainty that A) output will increase. B) both output and the interest rate will increase. C) the interest rate will decrease. D) the interest rate will increase. E) output will decrease. 10) 11) 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 up and to the left as the real money supply falls. B) shift down and to the right as the real money supply falls. C) shift up and to the left as the real money supply rises. D) shift down and to the right as the real money supply rises. 11) 2

3 12) In the Keynesian money market, velocity is A) positively related to the interest rate B) negatively related to the interest rate C) independent of the interest rate D) None of the above. 12) 13) Economists define investment as the purchase of A) any physical asset used by business to increase production and the repurchase of common stock. B) a new physical asset such as a new machine or a new house. C) business spending on capital and household spending on durable goods. D) any physical asset, whether new or not, used by business to increase production. 13) 14) In the ISLM framework, an expansionary fiscal policy causes aggregate output to and the interest rate to, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 14) 15) If the nominal interest rate is above the equilibrium level. A) purchases of bonds and other assets will cause the interest rate to fall B) the opportunity cost of holding money is low, and is rising C) issuance of bonds and other assets will cause the supply of real money balances to increase 15) 16) The IS curve shifts to the left when. A) taxes increase B) autonomous consumption increases C) autonomous investment increases 16) 17) The monetary transmission mechansim is the process by which changes in money supply lead to changes in real output and other real variables. Keynesian theory relies on the the effect of changes in money supply on the real interset rate to drive the mechansim. The short-run effect of a change in the supply of money on the interest rate is called the. A) Elasticity Effect B) Pigou Effect C) Liquidity Effect D) Quantum Entanglement 18) The money demand curve shifts to the right when A) income decreases B) there is a decrease in the interest rate C) there is an increase in the riskiness of interest-bearing assets D) income increases 17) 18) 3

4 IS Graph 2 19) On the graph above, a possible cause of the rightward shift of the IS curve is an increase in. A) taxes B) interest rates C) the exchange rate D) money supply 20) Let C = (Y-T), planned investment equals 150, and T equals 200. If the equilibrium level of (potential) output is 2,000, then the level of government spending needed to make this true is A) 100 B) 210 C) 200 D) ) A decline in the money stock will A) shift the LM schedule to the right B) not have any effect on the LM schedule C) shift the LM schedule to the left D) shift the IS schedule downward and to the right 19) 20) 21) 22) 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) ) 23) Suppose investment spending is NOT very sensitive to the interest rate. Given this information, we know that A) the LM curve should be relatively steep. B) the IS curve should be relatively steep. C) neither the IS nor the LM curve will be affected. D) the IS curve should be relatively flat. E) the LM curve should be relatively flat. 23) 4

5 24) 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 24) 25) As the nominal interest rate increases. A) the opportunity cost of holding money rises B) the quantity of money demanded falls C) it becomes more costly to hold money instead of bonds 25) 26) According to liquidity preference theory, as real income increases, so does. A) the real interest rate B) the demand for real money balances C) the supply of real money balances 26) 27) 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) $ ) 28) 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) The quantity supplied of bonds equals the quantity demanded of bonds. B) Production equals demand. C) Financial markets are in equilibrium. D) The money supply equals money demand. E) all of the above 28) 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 the money supply C) an increase in income 29) 30) The marginal propensity to consume represents A) total income minus total taxes. B) the change in consumption caused by a one-unit change in disposable income. C) the change in output caused by a one-unit change in autonomous demand. D) the level of consumption that occurs if disposable income is zero. E) the ratio of total consumption to disposable income. 30) 31) 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) rise; fall C) fall; fall D) fall; rise 31) 5

6 32) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess of goods which will cause aggregate output to. A) supply; rise B) demand; rise C) supply; fall D) demand; fall 33) In the classical model A) neither fiscal nor monetary policy can influence output B) both fiscal and monetary policy will have larger impacts on income C) fiscal policy cannot influence output D) none of the above 32) 33) 34) 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 bondʹs price must be A) $1150. B) $ C) $950. D) $ ) 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) 40 B) 20 C) 10 D) 5 34) 35) 36) 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 37) 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) 600 B) 420 C) 300 D) ) 37) 38) A change that increases real money demand relative to the real money supply causes A) the IS curve to shift down and to the left. B) the IS curve to shift up and to the right. C) the LM curve to shift down and to the right. D) the LM curve to shift up and to the left. 39) If Md = 3, r and Ms = 2,000, the MPC = 0.85, G=100, and T = 120, then the equilibrium interest rate is A) 5.0 B) 2.5 C) 10 D) 20 38) 39) 40) If aggregate demand falls short of current output, business firms will production to inventories. A) cut; build up B) expand; keep from accumulating C) expand; build up D) cut; keep from accumulating 40) 6

7 41) 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) down; left C) up; left D) up; right 41) 42) Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the following to occur? A) the IS curve shifts and the economy moves along the LM 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 LM curve shifts and the economy moves along the IS curve. 42) 43) Macroeconomic equilibrium requires. A) equilibrium in neither the goods nor the money market B) equilibrium in the money market C) equilibrium in the goods market D) equilibrium in both the goods and money markets 43) 44) If the government reduces spending. A) consumption will increase B) output will increase if interest rates remain fixed C) the IS curve will shift to the right 44) 45) An increase in the money supply would cause the IS curve to A) shift down and to the left. B) shift up and to the right only if people face borrowing constraints. C) shift up and to the right. D) remain unchanged. 45) Table 12-2 Consumption (dollars) Disposable Income (dollars) $600 $1, ,500 1,200 2,000 46) Refer to Table Given the consumption schedule in the table above, the marginal propensity to consume is A) 0.5. B) 0.6. C) D) ) 7

8 47) If people feel optimistic about the future of the economy. A) autonomous consumption might increase B) autonomous investment might increase C) it might shift the IS curve to the right 47) 48) Which of the following statements concerning Keynesian ISLM analysis is true? A) Expansionary fiscal policy will cause the interest rate to fall. B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. C) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. D) A fall in the money supply shifts the LM curve to the right. 48) 49) The traces out the points for which total quantity of goods produced equals total quantity of goods demanded. A) consumption function B) investment schedule C) IS curve D) LM curve 49) 50) 50) By referring to Figure above, an increase in the money stock A) shifts the LM schedule to the left from LM 0 to LM 2 B) leaves the LM curve unchanged at LM 0 C) shifts neither the IS nor the LM schedule D) shifts the LM schedule to the right from LM 0 to LM 1 8

9 Answer Key Testname: ECON3312_EXAM2_FALL_2014 1) A 2) C 3) D 4) E 5) D 6) D 7) A 8) A 9) C 10) A 11) D 12) A 13) B 14) A 15) A 16) A 17) C 18) D 19) E 20) B 21) C 22) B 23) B 24) B 25) D 26) B 27) C 28) E 29) C 30) B 31) D 32) B 33) A 34) B 35) B 36) B 37) A 38) D 39) B 40) D 41) B 42) A 43) D 44) E 45) D 46) B 47) D 48) C 9

10 Answer Key Testname: ECON3312_EXAM2_FALL_ ) C 50) D 10

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