Download Practice Exam for Chaps 27-28

Economics 2020, Accelerated
Spring, 2002
Quiz #4, Chapters 27 and 28
Dr. Alston
1. Which of the following is most unlikely to occur as a result of an increase in
government purchases used to finance war efforts in Afghanistan and financed by deficit
spending (i.e., an increase in the national debt)?
a. an increase in the supply of bonds
b. lower interest rates
c. a shift to the left of the LRAS curve (or the LRAS does not shift as much to the right)
d. a fall in the quantity of private investment demanded
2. Assume that the result of a statistical analysis showed that the following relationship
was found: Interest rate = 6.2 + (National debt) - Supply of M2), where  = 4.4,
=5.4, national debt = $2 trillion and M2 = 2.5 trillion. Then, what is the expected
interest rate?
a. 0.8
b. 1.5
c. 4.2
d. 9.6
3. The existence of automatic stabilizers in an economy tend to make the AD curve
_________ and __________the amount by which the quantity of aggregate demand
changes in response to, say a negative supply-side shock to the economy.
a. flatter ; increase
b. flatter; reduce
c. steeper; increase
d. steeper; reduce
4. Which of the following is the best example of an automatic stabilizer?
a. cutting tax rates during a recession
b. cutting the money supply during an expansion
c. rising tax collections during an expansion
d. changing unemployment compensation policies during a recession
5. Which of the following could not be expected to occur following a cut in business
taxes.
a. increased private investment
b. a shift to the left of the AD curve
c. a shift to the right of the SRAS curve in the long run
d. a higher level of real GDP
6. Consider an economy that is currently producing at its natural level of output. If this
economy were to experience a cut in the corporate profit tax, which of the following
would you expect to occur in the long run?
a. The SRAS curve will shift to the left and the LRAS will shift to the right.
b. The LRAS curve will shift to the left and the SRAS curve will shift to the right.
c. There will be a tendency to lower the price level (or reduce inflationary pressure) in the
long run, but not in the short run.
d. There will be a tendency to lower the price level (or reduce inflationary pressure) in
the short run, but not in the long run.
7. Which of the following would reduce the likelihood of crowding out?
a. an increasing demand for bonds as the government engages in expansionary fiscal
policy.
b. the Fed selling bonds as the government engages in expansionary fiscal policy.
c. increased exports as the government engages in expansionary fiscal policy.
d. all of the above
8. Crowding out will be a more significant concern if
a. the demand for bonds curve is horizontal.
b. the demand for money curve is horizontal.
c. the level of investment changes significantly in response to small changes in the
interest rate.
d. Both a and b, but not c, are correct.
9. If the MPC = 0.75, how much of an increase in autonomous private investment is
needed to raise real GDP by $50 million? Assume a simplified economy (i.e., that the
price level remains constant and that the tax rate is equal to zero).
a. $10 million
b. $12.5 million
c. $40 million
d. $50 million
10. The economy of Muricia has just experienced a permanent reduction in its income tax
rates. After the tax cut, consumption did not increase. This response is consistent with
a. the current income theory of consumption but not the permanent income theory of
consumption.
b. the permanent income theory of consumption but not the current income theory of
consumption.
c. both the current and permanent income theories of consumption.
d. neither the current nor permanent income theories of consumption.
11. Which of the following marginal propensities to consume and multipliers go together
(assume a simplified economy with a tax rate of zero and all components of aggregate
expenditures, except consumption, are autonomous)?
a. MPC = 0.8; multiplier = 1.0
b. MPC = 0.6; multiplier = 2.0
c. MPC = 0.75; multiplier = 4.0
d. MPC = 0.9; multiplier = 8.0
12. Because the price level tends to change as autonomous expenditures increase, the
multiplier is useful for determining the extent to which the AD curve shifts to the right
but/and it _______________ the effect of a change in autonomous expenditures on real
GDP.
a. overstates
b. understates
c. accurately indicates
d. sometimes overstates and sometimes understates
13. Assume that government spending increases by $1,000. Also assume that the price
level remains constant and that all other components of aggregate expenditures are
strictly autonomous and the tax rate is zero. With an MPC of 0.75, the multiplier is
______ and we can predict that after all rounds of new consumption spending caused by
the increase in government purchases, saving will have ________ by ___________.
a. 1.33; decreased; $1,000
b. 1.33; increased; $1,000
c. 4; increased; $250
d. 4; increased; $1,000