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Practice MCQs: 1. If a shift in the AD curve has no impact on the price level, then a. b. c. d. e. the unemployment rate must be extremely low the AD curve must be vertical the AS curve must be horizontal the AS curve must be vertical both a. and d Answer: C 2. If an increase in the AD curve causes prices to increase slightly but output to increase significantly, then a. b. c. d. e. the AS curve must be very flat the AD curve must be very steep both AD and AS curves must be very steep we must be looking at the long run AD-AS model we must be looking at the short run AD-AS model Answer: A 3. As the economy enters into boom, we can generally expect that a. b. c. d. e. inflation will decrease with little change in the unemployment rate unemployment will increase and inflation will decrease nominal GDP will increase but only because of an increase in the price level inflation will increase and the unemployment rate will decrease output will increase with little change in unemployment and inflation Answer: D 4. Depreciation is a. b. c. d. e. the difference between gross investment and net investment the difference between GDP and NDP the difference between GNP and NNP another word for capital consumption allowances none of the above Answer: E 5. If the government increases taxes, which of the following is LEAST likely to occur? a. b. c. d. e. a decrease in private savings a decrease in consumption an increase in investment a decrease in net exports a decrease in national income Answer: D 6. Assume you want a real rate of return of 3% on a financial investment and you expect annual average inflation rate to be 4.5%. What would be the listed nominal interest rate on this financial security? a. b. c. d. e. 3% 4.5% 6% 7.5% it cannot be determined from this information Answer: D 7. Which of the following policies does NOT affect the long term growth rate of a nation? a. b. c. d. e. investment tax credits and R&D subsidies an expansionary fiscal/expansionary policy mix increased funding for primary education incentives to increase saving both b and c Answer: B 8. The Keynesian AS curve differs from the AS curve of the classical economists, since Keynes a. b. c. d. e. thought that nominal wages were flexible even when there was unemployment thought that labor markets worked smoothly to always establish full employment described the AS curve as completely vertical thought that nominal wages were rigid even when there was unemployment assumed that firms tried to exploit the work force by paying them substandard wages Answer: D 9. The upward sloping AS curve will shift to the left if a. labor force productivity increases b. c. d. e. actual output is lower than the full-employment level the mark up over labor cost falls actual output is higher than the full-employment level the level of potential output increases Answer: D [Inflationary Output Gap] 10. The execution lag is defined as the length of time it takes a. b. c. d. e. to recognize whether a disturbance has occurred to come up with the appropriate policy response to a disturbance to account for the recognition, decision, and the action lags all together for a policy to affect the economy after its implementation to convince bureaucrats inside the government that decision needs to be taken Answer: D 11. In a model with no government or foreign sector, if saving is defined as S = -200 + 0.1Y and Ig = 20, what is the equilibrium level of consumption? a. b. c. d. e. 3800 3600 1800 2000 1000 Answer: A 12. Which of the following id TRUE as we move along the IS-curve? a. a lower interest rate is compatible with a higher equilibrium real income level b. a higher equilibrium level of real income is compatible with a higher interest rate c. a lower equilibrium level of real income is compatible with a higher transactions demand for money d. a higher interest rate is compatible with a higher level of saving e. higher interest rates are compatible with higher bond prices Answer: A 13. Which of the following would cause a shift in the LM curve to the right? a. b. c. d. e. an increase in interest rates an increase in autonomous saving an increase in money supply a decrease in money supply a decrease in taxes Answer: C 14. In an IS-LM model, which is likely to occur a. an expansionary fiscal policy will not be crowded out if the Fed undertakes open market sales at the same time b. expansionary monetary policy will affect investment by affecting interest rates c. increased government spending will not affect national income unless it is financed by an increase in money supply d. tax cuts will increase the slope of the IS curve and thus increase income e. none of the above Answer: B 15. A country’s balance of payments surplus is equal to a. b. c. d. e. the decrease in the country’s official exchange reserves net capital outflow minus the current account deficit the current account surplus plus private net capital flow exports minus imports imports minus exports Answer: B Don’t forget your calculators! Please do prepare chapters 7, 9 and 10 from pre-mid course and chapter 36 from Lipsey thoroughly. Also, prepare chapter 37 and 39 (policies under fixed and flexible exchange rates). There will be 60 MCQs and you will have exactly 60 minutes to do them. The subjective portion will be 90 minutes long. All the best!!