Download Midterm #2

ECO 102
Fall 2002 Semester
Midterm #2
Name: _________________________
Student ID#: ____________________
Instructions: Provide answers to the following questions. Show your work as much as
possible. For the multiple choice, make sure you have one and only one final choice
clearly indicated for each question
Part I:
Suppose there is a country whose economy behaves exactly according to the Keynesian
theory. We have discovered the following facts about this country:
AS = 400
consumption function
planned (desired) investment
government expenditure
exports
imports
taxes
disposable income
C = 60 + (0.75)·(YD)
I = 50
G = 40
X = 30
M = (0.25)· (YD)
T = (0.2) ·(Y)
YD = Y – T
1.
Sketch the aggregate expenditure diagram in the space below. Be sure to label the
graph completely.

0

100

200

300
|
400
2.
Calculate the exact level of income for which the product market would be in
equilibrium.
3.
Suppose the government wishes to change government spending enough to bring
the equilibrium level of income to the full-employment level. What is the new level of
government spending?
4.
Suppose the country joins the EU. As a result, the barriers to imported goods from
the EU are reduced, and more imported goods are available to consumers at lower prices
than before. At the same time, the country's producers can sell their goods more easily in
EU markets, making exports easier. Would these changes make attempts by the
government to use expansionary fiscal policy to reduce unemployment more effective or
less effective? Explain your reasoning.
1.
The aggregate demand and supply model of the product market presented in the
Keynesian unemployment model is based on the assumption that:
A.
B.
C.
D.
E.
interest rates and product prices are fixed.
wages and product prices are fixed.
wages, interest rates, and product prices are fixed.
wages are fixed.
product prices are fixed.
2.
An increase in the interest rate:
A.
increases the present discounted value of investment projects, making fewer of
them profitable.
B.
reduces the present discounted value of investment projects, making more of them
profitable.
C.
reduces the present discounted value of investment projects, making fewer of
them profitable.
D.
has no effect on the present discounted value of investment projects.
E.
increases the present discounted value of investment projects, making more of
them profitable.
3.
To increase investment in a closed economy using the basic competitive model:
A.
B.
C.
D.
E.
shift the investment function to the left or the savings curve to the right.
shift the investment function to the right or the savings curve to the left.
shift either the investment function or the savings curve to the right.
shift either the investment function or the savings curve to the left.
negotiate with foreign counties to reduce world interest rates.
4.
In income-expenditure analysis, if aggregate expenditures lie below the 45-degree
line, unplanned inventories are:
A.
B.
C.
D.
E.
negative, so firms reduce production.
positive, so firms reduce their prices.
negative, so firms increase production.
positive, so firms reduce production.
negative, so firms increase their prices.
5.
The figure above shows the capital market of a small open economy. The point A
denotes the international real interest rate. An increase in the budget deficit has:
A.
B.
C.
D.
E.
shifted the savings curve to the left, reducing the real rate of interest.
shifted the savings curve to the left, increasing the real rate of interest.
shifted the savings curve to the right, increasing the real rate of interest.
shifted the savings curve to the right, reducing the real rate of interest.
shifted the savings curve to the left, with no effect on the real rate of interest.
6.
A fiscal stimulus occurs when a government manipulates:
A.
B.
C.
D.
E.
its expenditures and taxes to redistribute income to the less well off.
its taxes and subsidies to correct problems associated with externalities.
its expenditures and taxes to ensure an appropriate supply of public goods.
the interest rate to stabilize macroeconomic performance.
its expenditures and taxes to stabilize macroeconomic performance.
7.
If the economy has a downwardly rigid wage and excess capacity, an increase in
capacity shifts:
A.
the aggregate demand curve rightward, but leaves output unchanged.
B.
the aggregate demand curve rightward, and raises output.
C.
the aggregate supply curve rightward, and raises output.
D.
the aggregate supply curve rightward, but leaves output unchanged.
E.
neither aggregate supply nor aggregate demand, with the result that output is
unaffected.
8.
Consider the general equilibrium of a closed economy based on the competitive
model. Crowding out refers to a situation in which, when the government raises its
spending and pays for it by increasing taxes:
A.
consumption and saving are discouraged, the real interest rate falls, and
investment falls.
B.
consumption and saving are discouraged, the real interest rate rises, and
investment rises.
C.
consumption and saving are discouraged, the real interest rate falls, and
investment rises.
D.
consumption and saving are discouraged, the real interest rate rises, and
investment falls.
E.
consumption and saving are encouraged, the real interest rate rises, and
investment falls.
9.
The figure above shows the aggregate capital market of a small open economy. If
r* is the internationally determined real rate of interest:
A.
equilibrium investment is at point A, equilibrium saving is at point B, and lending
abroad is B - A.
B.
equilibrium investment is at point B, equilibrium saving is at point A, and
borrowing from abroad is B - A.
C.
equilibrium investment is at point B, equilibrium saving is at point A, and lending
abroad is B - A.
D.
equilibrium investment equals equilibrium saving at point A.
E.
equilibrium investment is at point A, equilibrium saving is at point B, and
borrowing from abroad is B - A.
10.
In a small open economy, an increase in the budget deficit:
A.
B.
C.
D.
E.
reduces foreign borrowing but leaves the real rate of interest unchanged.
increases both the real rate of interest and foreign borrowing.
increases foreign borrowing but leaves the real rate of interest unchanged.
reduces both the real rate of interest and foreign borrowing.
increases the real rate of interest but leaves foreign borrowing unchanged.
11.
One reason the aggregate demand curve is downward sloping is that:
A.
as the price level rises, households' real wealth falls and they increase their
consumption.
B.
as the price level falls, households' real wealth increases and they reduce their
consumption.
C.
as the price level rises, households' real wealth increases and they reduce their
consumption.
D.
as the price level falls, households' real wealth increases and they increase their
consumption.
E.
as the price level falls, households' real wealth falls and they increase their
consumption.
12.
The aggregate expenditures schedule:
A.
B.
C.
D.
E.
is vertical.
assumes the price level is completely flexible.
plots aggregate demand against the price level.
is negatively sloped.
is drawn for a fixed price level.
13.
When the central bank reduces interest rates, it hopes to:
A.
raise private investment, reduce aggregate demand, and increase unemployment.
B.
raise private investment, increase aggregate demand, and reduce unemployment.
C.
reduce private investment, increase aggregate demand, and reduce
unemployment.
D.
raise private investment, reduce aggregate demand, and reduce unemployment.
E.
raise private investment, increase aggregate demand, and increase unemployment.
14.
In a small open economy an increase in the budget deficit:
A.
B.
C.
D.
E.
decreases the interest rate but increases investment.
reduces the interest rate and investment.
does not change the interest rate or investment.
increases the interest rate and investment.
increases the interest rate but reduces investment.
15.
Suppose an economy is initially operating at the intersection of the aggregate
demand and aggregate supply curves. If the price level is rigid, and the aggregate demand
curve shifts leftward:
A.
the price falls to its market clearing level, with no reduction in output.
B.
the price stays above its market clearing level, with no reduction in output.
C.
the price stays above its market clearing level and output falls.
D.
the price falls to its market clearing level and output falls.
E.
the price stays at its original level and aggregate demand shifts back to its original
position.
16.
The figure above shows the aggregate labor market, which is initially in
equilibrium at W2 and L2. If the wage is rigid, and the labor demand curve shifts
leftward:
A.
the wage falls at W1, and the quantity of labor used in the economy stays at L2.
B.
the wage stays at W2, and the quantity of labor used in the economy stays at L2.
C.
the wage falls to W1, and the quantity of labor used in the economy falls to L1.
D.
the wage falls to W1, and as a result the labor demand shifts back to its original
position.
E.
the wage stays at W2, and the quantity of labor used in the economy falls to L1.
17.
In income-expenditure analysis, an increase in investment:
A.
has no effect on either the aggregate expenditures schedule or the equilibrium
level of national income.
B.
shifts up the aggregate expenditures schedule, increasing equilibrium national
income by a multiple of the increase in investment.
C.
shifts up the aggregate expenditures schedule, increasing equilibrium national
income by the amount of the increase in investment.
D.
changes the slope of the aggregate expenditures schedule, increasing equilibrium
national income by a multiple of the increase in investment.
E.
changes the slope of the aggregate expenditures schedule, increasing equilibrium
national income by the amount of the increase in investment.
18.
In income-expenditure analysis, if total inventories exceed planned inventories:
A.
B.
C.
D.
E.
the economy is below its equilibrium output.
aggregate expenditures are less than national output.
the economy is at its equilibrium output.
aggregate expenditures equal national output.
aggregate expenditures exceed national output.
19.
In income-expenditure analysis, the change in the equilibrium level of national
income that results from a given change in the level of investment is larger the:
A.
B.
C.
D.
E.
the greater is the level of autonomous consumption.
the greater is the initial level of investment.
steeper is the aggregate expenditures schedule.
lower is the initial level of national income.
flatter is the aggregate expenditures schedule.
20.
Aggregate demand slopes downward because as the price level falls:
A.
firms reduce their quantity supplied.
B.
Aggregate demand does not slope down, it is assumed to be inelastic.
C.
households substitute among goods.
D.
the real value of money and other dollar denominated assets rises and households
increase consumption.
E.
households fear inflation and stock up on necessities.