Download Practice Test # 3

Practice Test # 3
Useful formulas/expressions:
(1) MPC = ∆ C / ∆ DI or ∆ C / ∆ YD & MPC + MPS = 1
(2) Exp. Multiplier = 1/(1-MPC)
∆GDP = Exp Mult. * ∆AE
(3) Δ AE = Δ Income * MPC
(4) DD Multiplier = 1/rrr
∆DD = DD Mult. * ∆Reserves
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
____
1. Long-run full-employment equilibrium assumes:
a. a downward-sloping production function.
b. a downward-sloping long-run supply curve (LRAS).
c. the CPI index price level equals the equilibrium wage rate.
d. the CPI equals aggregate demand (AD) equals short-run aggregate supply (SRAS) equals
long-run aggregate supply (LRAS).
2. Which of the following would cause a decrease in the short-run aggregate supply curve (SRAS)?
a. An increase in oil prices.
b. An advance in technology.
c. An increase in the CPI.
d. An increase in the long-run aggregate supply curve (LRAS).
Exhibit 10A-1 Aggregate demand and supply model
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____
____
____
____
____
3. Beginning in Exhibit 10A-1 from long-run equilibrium at point E1, the aggregate demand curve shifts to AD2 .
The economy's path to a new long-run equilibrium is represented by a movement from:
a. E3 to E1 to E2.
b. E1 to E3 to E2.
c. E2 to E1 to E2.
d. E1 to E2 to E3.
4. Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the
following?
a. People's desire to maintain real wealth holdings, the interest rate, and international trade.
b. People's desire to increase the price level, the interest rate, and the economic growth
effect.
c. The interest rate, the economic growth effect, and international trade.
d. Cost-pull inflation, demand-pull inflation, and the need to maintain real wealth holdings.
e. Recession phases of the business cycle, upturns, and downturns.
5. The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and
the interest rate.
a. direct
b. independent
c. linear
d. inverse
6. Which of the following will not shift the aggregate demand curve to the right?
a. Consumers becoming more optimistic about the future.
b. An increase in government spending.
c. Business optimism increases.
d. Consumers become pessimistic about the future.
7. A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future
consumer income will fall will all cause aggregate:
a. demand to shift outward.
b. demand to shift inward.
c. supply to shift outward.
d. supply to shift inward.
e. supply and aggregate demand to both shift equally inward.
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Exhibit 10-8 Aggregate demand and supply
____
8. In Exhibit 10-8, if aggregate demand shifts from AD3 to AD2, real GDP will:
a. fall from $7.0 to $4.0, and the price level will not change.
b. not change, and the price level will fall from 120 to 100.
c. fall from $7.0 to $3.0, and the price level will fall from 120 to 100.
d. fall from $8.0 to $4.0, and the price level will fall from 120 to 100.
e. fall from $7.0 to $4.0, and the price level will fall from 120 to 100.
Exhibit 11-1 income and consumption data
____
Income (Y)
Change in Income
0
1,000
2,000
3,000
4,000
5,000
1,000
1,000
1,000
1,000
1,000
Consumption
(C)
500
1,400
2,200
2,900
3,500
4,000
9. In Exhibit 11-1, when income (Y) is increased from $0 to $1,000 to $2,000, the marginal propensity to
consume:
a. is 1.
b. decreases from 0.9 to 0.8.
c. decreases from 0.8 to 0.7.
d. increases from 0.8 to 0.9.
e. is negative.
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____ 10. Assume the economy is in recession and real GDP is below full employment. The marginal propensity to
consume (MPC) is 0.50, and the government follows Keynesian economics by using expansionary fiscal
policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can
restore full employment, the government should:
a. increase spending by $250 billion.
b. decrease spending by $500 billion.
c. increase spending by $1,000 billion.
d. increase spending by $500 billion.
Exhibit 11-5 Aggregate demand and supply model
____ 11. Suppose the economy in Exhibit 11-5 is in equilibrium at point E1 and the marginal propensity to consume
(MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2
and reduce inflation:
a. increasing government spending by $50 billion.
b. decreasing government spending by $6 billion.
c. decreasing government spending by $100 billion.
d. decreasing government spending by $50 billion.
____ 12. Suppose the economy in Exhibit 11-5 is in equilibrium at point E1 and the marginal propensity to consume
(MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2
and reduce inflation:
a. increasing government tax revenue by $6 billion.
b. decreasing government tax revenue by $6.1 billion.
c. decreasing government tax revenue by $200 billion.
d. increasing government tax revenue by approximately $66 billion.
e. decreasing government tax revenue by approximately $66 billion.
____ 13. When the economy enters a recession, automatic stabilizers create:
a. higher taxes.
b. more discretionary spending.
c. budget deficits.
d. budget surpluses.
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____ 14. A tax where wealthy people pay a larger percentage of their income than poor people is known as a (an):
a. excise tax.
b. flat tax.
c. proportional tax.
d. progressive tax.
e. regressive tax.
____ 15. Which of the following statements is true?
a. A sales tax on food is a regressive tax.
b. The largest source of federal government tax revenue is individual income taxes.
c. The largest source of state and local governments tax revenue is sales and excise taxes.
d. All of the above are true.
e. None of the above are true.
____ 16. Cost-benefit principles can be applied to the decision of:
a. profit-maximizing firms.
b. majority-rule voting.
c. which project receives the most votes.
d. rational ignorance.
e. all of the above.
____ 17. If something is a medium of exchange, then it:
a. serves as a yardstick for measuring the value of other goods.
b. is a means of holding wealth for the future.
c. has an absolute value in gold.
d. is widely accepted as payment for purchases.
____ 18. If something is a unit of account, then it:
a. serves as a yardstick for measuring the relative value of other goods
b. is a means of holding wealth for the future
c. is fairly stable
d. is durable and portable
e. is accepted as payment for any purchase
____ 19. Which one of the following items would be the most liquid?
a. Pizza.
b. Ticket to next week's basketball game.
c. Stereo.
d. Dollar bill.
e. U.S. savings bond.
____ 20. The Fed:
a. has little control over the money supply.
b. serves as the central bank for the United States.
c. often uses a mix of lower taxes in its fiscal policy.
d. ensures commercial bank profitability.
____ 21. The Federal Reserve System is owned by:
a. federal government agencies such as the Treasury.
b. the Congress of the United States.
c. the banks that are members of the Federal Reserve System.
d. anyone who buys stock over the counter.
e. people who have deposits in member banks.
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____ 22. The Federal Reserve Board of Governors has:
a. seven members who serve 6-year terms.
b. 12 members who serve 14-year terms.
c. seven members who serve 4-year terms.
d. 12 members who serve 4-year terms.
e. seven members who serve 14-year terms.
____ 23. Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are
subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. A
commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount
of:
a. $10.
b. $90.
c. $100.
d. $1,000.
____ 24. If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans totaling
$60,000, the maximum possible, then the money multiplier must be:
a. 2.
b. 2.5.
c. 3.
d. 3.5.
e. 4.
____ 25. Which of the following actions by the FED would increase the money supply?
a. Reducing the required reserve ratio.
b. Selling bonds in the open market.
c. Increasing the discount rate.
d. None of the above.
____ 26. The Fed's countercyclical policy tools to eliminate a recession include lowering:
a. the required reserve ratio, cutting the discount rate, and selling government bonds on the
open market.
b. the required reserve ratio, raising the discount rate, and selling government bonds on the
open market.
c. the required reserve ratio, raising the discount rate, and buying government bonds on the
open market.
d. the discount rate, cutting the discount rate, and raising the margin requirement.
e. the reserve requirement, lowering the discount rate, and buying government bonds on the
open market.
____ 27. The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or
other nonmoney financial assets is the:
a. unit-of-account motive for holding money.
b. precautionary motive for holding money.
c. speculative motive for holding money.
d. transactions motive for holding money.
____ 28. Assume a fixed demand for money curve and the Fed decreases the money supply. In response, people will:
a. sell bonds, thus driving up the interest rate.
b. sell bonds, thus driving down the interest rate.
c. buy bonds, thus driving up the interest rate.
d. buy bonds, thus driving down the interest rate.
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____ 29. The Keynesian cause-and-effect sequence predicts that an increase in the money supply will cause interest
rates to:
a. fall, boosting investment and shifting the AD curve rightward, leading to an increase in
real GDP.
b. fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real
GDP.
c. rise, cutting investment and shifting the AD curve rightward, leading to an increase in real
GDP.
d. rise, boosting investment and shifting the AD curve rightward, leading to an increase in
real GDP.
e. fall, cutting investment and shifting the AD curve leftward, leading to a decrease in real
GDP.
____ 30. According to the equation of exchange, if V = 5, P = 100, and Q = 10, the M is:
a. 20.
b. 10.
c. 500.
d. 1,000.
e. 200.
____ 31. If V = 5, P = 100, and Q = 10, then M is:
a. 20.
b. 10.
c. 500.
d. 1,000.
e. 200.
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Short Answer: Answer all the following questions. Use graphs and equations when they are asked for.
Question 1:
a. Explain the shape of the AD curve and what each point on the curve entails?
b. What does the AS curve show you? Why is it upward sloping?
c. Using both graphs illustrate equilibrium and explain what it means when the AS and AD curve meet.
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Question 2
a. Given that there is a recessionary GAP of 500 Billion dollars and we have an MPC=.8, calculate the amount
of spending that would be necessary to achieve FE-GDP?
b. Using the calculations above show the results on the AE and AD/AS graphs. Make sure to use your calculations when labeling the graphs.
c. How would your answer change if instead of a spending change the gov’t wanted to implement a tax cut
to achieve the same result?
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Question 3
a) Given that we have an rrr=.08, what would happen if the FED bought 80 billion in bonds?
b)Suppose that we had a change in the rrr=.12, what would happen if the FED sold 80 billion in government
bonds?
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Question 4:
a) What happens to GDP if there is a shift inward of MS that the FED has intentionally (ie it was what the
meant to do) caused? Use both the AE-Line and the AD line in your analysis.
b) Why would the FED engage in such an action? Keep in mind the FED targets inflation and FE-levels
when considering its course of action.
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