Download Third Quiz with answers

AEM 1300
Third Quiz
July 15, 2016
NAME: ___________________________________________________
CORNELL NET ID (Cornell Email Adress) __________________________
Signature __________________________________________________
Point values for each question are indicated. Total points – 20
Part I (Each Question is worth 1 point)
1. Let’s assume that Ithaca is a “simple closed economy with no government and no
international trade”. The consumption function in Ithaca is: C = 300 + 0.7Y. Assume also
that desired investment (Id) is totally exogenous. In this economy, what’s the value of the
investment multiplier?
A) 0.7
B) 1.43
C) -1.43
D) -0.7
E) 3.33
2. Which of the following is correct for a closed economy in which consumption is a function of
disposable income?
A) The balanced-budget multiplier is equal to 1 because government spending is always equal
to taxes.
B) The balanced-budget multiplier is equal to 1 because the government spending multiplier
plus the tax multiplier will equal to 1.
C) The balanced-budget multiplier is the ratio of the change in government spending to a
change in equilibrium level of output.
D) The balanced-budget multiplier is the ratio of government spending to output level.
E) None of the above is correct.
F) All of the above are correct.
3. Bank of Ithaca has $100 million in deposits. Bank of Ithaca is meeting its reserve
requirement and has no excess reserves. It has $10 million in reserves. Bank of Ithaca faces a
required reserve ratio of
A) 10%.
B) 20%.
C) 9.1%.
D) 11%.
E) 5%.
4. If the Fed were to announce that it would follow an “easy” monetary policy over the next few
month, we would expect to see
A) A decrease in money supply
B) Open market purchases of securities by the Fed
C) Increasing interest rate
D) A rise in required reserve ratio
E) An increase in discount rate
5. Examples of “automatic stabilizers” include:
A) the debt ceiling
B) Property taxes
C) Income taxes
D) All of the above
E) None of the above
6. Assume an economy is completely represented by the following equations: C=200 +0.8Y d (,
where Y d stands for disposable income), I = 150, G = 200, T = 200. In this economy, the
government spending multiplier is __________ and the tax multiplier is ________________.
A)
B)
C)
D)
E)
1.25, 0.25
5, 4
1, -1
1.25, -0.25
5, -4
7. If consumption only depends on income, then, all else equal, a higher saving rate would
F) decrease MPC, and increase the multiplier so that changes in planned investment will have
a larger impact on equilibrium output
G) increase MPC, and increase the multiplier so that changes in planned investment will have
a larger impact on equilibrium output
H) increase MPC, and decrease the multiplier so that changes in planned investment will have
a smaller impact on equilibrium output
I) decrease MPC, and decrease the multiplier so that changes in planned investment will have
a smaller impact on equilibrium output
J) None of the above is correct
8. Which one of the following is NOT included in what the U.S. government defines as M1?
F) Currency in circulation
G) Checkable deposits
H) Demand deposits
I) Savings accounts
J) Traveler’s checks
9. Which of the following factors can lead to a decrease in the equilibrium interest rate level?
I.
II.
III.
IV.
V.
VI.
F) II, III, and V.
The Fed decreases the required reserve ratio.
The Fed increases the required reserve ratio.
The Fed sells securities in the open market.
The Fed purchases of securities in the open market.
People’s income and wealth decreases.
Price level increases.
G) I, IV and VI.
H) II, III and VI.
I) I, IV and V.
10. The Fed wants to increase the money supply. In which answer do both listed options have
the potential to work?
A) The Fed sells securities to the public & lowers the required reserve ratio.
B) The Fed sells securities to the public & raises the required reserve ratio.
C) The Fed buys securities from the public & raises the required reserve ratio.
D) The Fed buys securities from the public & lowers the required reserve ratio.
E) The Fed sells securities to the public & lowers the discount rate.
PART II
Question 1 (3 parts, each worth 1 pt.)
Assume that the following set of equations completely describes an open economy. All values are in the
million dollars.
Goods Market
Y = 34,250
C = 2,900 + 0.8Yd, (Yd = disposable income = Y-T)
T = 500
I = 2,500
G = 1,000
EX = 1,200
IM = 350
a) Calculate Aggregate Expenditure.
Answer 1:
AEx = C + I + G + (EX – IM)
= 2900 + 0.8(Y-500) + 2500 + 1000 + 1200 – (350)
= 6850 + 0.8Y = 34,250
Answer 2:
By the equilibrium condition, AEx = Y. Thus AEx=34,250
b) What is the government (expenditure) multiplier? And what is the value of federal deficit
or surplus?
K (G) = 1/(1-mpc)=1/0.8= 5
[G-T] = -500, there is a Federal deficit of $500
c) What is the Leakages and Injections condition for equilibrium?
Im + S + T = Ex + I + G
Question 2 (3 points)
What are the three main tools used by the Federal Reserve to control the Money Supply?
Required reserve ratios
Discount rate
Open market operations
Question 3 (4 points)
a. Draw a graph of equilibrium output in the goods market with all appropriate labels, including
Planned Aggregate Expenditure, etc.
see graph in text
b. Show the change in equilibrium output that would occur if the government decided to cut
spending.
Equilibrium Y goes down
c. Show what would happen to equilibrium output if the government decided to cut taxes.
Equilibrium Y goes up
d. Suppose the government decided to cut both spending and taxes at the same time and by the
same amounts. Would equilibrium output go up or down?
Down