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Econ 10233
Introduction to Macroeconomics
John Lovett
Chapter 13 Extra Study Questions
1.
____ The country of Transmania is currently at its normal level of output (i.e. QAct = QNat). The
Transmanian government normally collects $120 billion in taxes and spends $120 billion. However,
the voters of Transmania recently approved a referendum in which the government will spend $60
billion more ($180 billion instead of the usual $120 billion) and fund this increase in government
spending by printing $60 billion. In the long-run, this extra $60 billion of government spending:
a. will result in less real private sector production.
b. will not change the level of real private sector production.
c. will result in more real private sector production.
2.
Which of the following explain the answer for question 1, above? Check (9) any and all that apply.
____ If society “voluntarily” (i.e. through voting) chooses to increase government spending, there is
not real opportunity cost.
____ When a government funds its spending by printing money, it does not reduce resources
available to the private sector. The private sector still has all their money and resources.
____ Any expansion of government, in the long-run, means fewer resources for the private sector.
3.
____ The country of Stenborgia is currently at its normal level of output (i.e. QAct = QNat). The
Stenborgian government normally collects $120 billion in taxes and spends $120 billion. However, the
voters of Stenborgia recently approved a referendum in which the government will spend $60 billion
more ($180 billion instead of the usual $120 billion) and fund this increase in government spending by
$60 billion in increased taxes. In the long-run, this extra $60 billion of government spending:
a. will result in less real private sector production.
b. will not change the level of real private sector production.
c. will result in more real private sector production.
4.
Which of the following explain the answer for question 3, above? Check (9) any and all that apply.
____ If society “voluntarily” (i.e. through voting) chooses to increase government spending, there is
not real opportunity cost.
____ When a government funds its spending by collecting taxes, it does not reduce resources
available to the private sector. It merely redistributes resources among the private sector.
____ Any expansion of government, in the long-run, means fewer resources for the private sector.
5.
____ The country of San Lorenzo is currently at its normal level of output (i.e. QAct = QNat). The San
Lorenzen government normally collects $120 billion in taxes and spends $120 billion. However, the
voters of San Lorenzo recently approved a referendum in which the government will spend $60 billion
more ($180 billion instead of the usual $120 billion) and fund this increase in government spending by
$60 billion in increased taxes. In the long-run, this extra $60 billion of government spending:
a. will result in less real private sector production.
b. will not change the level of real private sector production.
c. will result in more real private sector production.
6.
Which of the following explain the answer for question 5, above? Check (9) any and all that apply.
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Econ 10233
Introduction to Macroeconomics
John Lovett
____ If society “voluntarily” (i.e. through voting) chooses to increase government spending, there is
not real opportunity cost.
____ When a government funds its spending by borrowing, it does not reduce resources available to
the private sector. It merely takes money out of banks.
____ Any expansion of government, in the long-run, means fewer resources for the private sector.
7-9.
The economy of San Glucos is initially (point A) at its normal
level of output (i.e. QAct = QNat). Then (points B & C), the San
Glucosian government greatly increases its spending. Assume
no change in
st
1 : Draw and label a PPC curve at right.
2nd: Draw and label point A, showing where the economy is
initially.
3rd: Draw and label point B, showing where the economy goes,
as a result of the change in government spending, in the shortrun.
4th: Draw and label point C, showing where the economy goes,
as a result of the change in government spending, in the long-run.
Hints for Graphing 7-9 and 10-12
1) The vertical axis should be labeled with one of the following:
• Private Sector
• Consumption & Investment
• or C + I
2) You should have a downward sloping, labeled, PPC:
10-12. The economy of San Glucos is initially (point A) at its normal
level of output (i.e. QAct = QNat). Then (points B & C), the San
Glucosian government greatly decreases its spending. Assume
no change in the economy’s normal capacity during this time
frame (A to B to C).
1st: Draw and label a PPC curve at right.
2nd: Draw and label point A, showing where the economy is
initially.
3rd: Draw and label point B, showing where the economy goes,
as a result of the change in government spending, in the shortrun.
4th: Draw and label point C, showing where the economy goes,
as a result of the change in government spending, in the long-run.
13.
____ What country undertook the “Great Leap Forward”?
a. China (People’s Rep. of China)
b. China (Taiwan)
e. France
c. India
f. Germany
d. Egypt
g. Mexico
2
h. North Korea
i. Soviet Union
j. United Kingdom
Econ 10233
14.
Introduction to Macroeconomics
John Lovett
____ In what decade did this country undertook the “Great Leap Forward”?
a. 1920’s
d. 1950’s
g. 1980’s
b. 1930’s
e. 1960’s
h. 1990’s
c. 1940’s
f. 1970’s
i. 2000’s
15 - 16: Yikes! The economy is in a recession. Two economists read the following headline; “Congress
passes a large increase in government spending financed by government borrowing.”
16.
____ Charla’s response is; “More government spending? Interesting. This will really stimulate the
economy help cure the recession.” Charla is:
a. thinking about the long-run.
b. thinking about the short-run.
c. committing a fallacy of composition. He is assuming government spending has no affect on other
sectors of the economy.
d. committing a post hoc ergo proctor hoc fallacy . He is assuming the increase in government
spending caused the prior recession.
e. Secretly attracted to Bob. Everyone knows that people who say; “Good golly gosh” are sexy.
17.
____ Which of the PPCs below illustrates Bob’s comment?
a.
b.
PP
PP
C
C
2
1
1
r Real Interest Rate
2
1
2
PP
C
r Real Interest Rate
e.
Loanable Funds
18.
Investment
Investment
PP
C
Loanable Funds
____ Which PPCs above illustrates Charla’s comment?
3
1
C
Investment
d.
2
PP
1
c.
Consumption
and Government
2
Consumption
and Government
____ Bob’s response is; “I’m worried this will result in less private sector production. The private
sector will have a smaller share of production because of this.” Bob is:
a. thinking about the long-run.
b. thinking about the short-run.
c. committing a fallacy of composition. He is assuming government spending has no affect on other
sectors of the economy.
d. committing a post hoc ergo proctor hoc fallacy . He is assuming the increase in government
spending caused the prior recession.
Consumption
and Government
15.
Econ 10233
Introduction to Macroeconomics
John Lovett
#’s 19 – 21. In the country of Absurdistan, the market for loanable funds is initially in equilibrium.
Absurdistan also has balanced trade (exports = imports). Then, Absurdistani households
decide to save more of their income than in the past.
19.
____ Assume interest rates have not yet changed in reaction to the above changes in savings. What
condition will result in the loanable funds markets because of the changes above?
a. There will be a surplus of loanable funds.
b. The lonable funds market will stay in equilibrium as long as interest rates don’t change.
c. There will be a shortage of loanable funds.
20.
____ Now assume interest rates have been given enough time to change in reaction to the changes in
savings. In the long-run, what is likely to happen to real interest rates because of the changes above?
a. Real interest rates rise.
c. Real interest rates fall.
b. Real interest rates are unchanged.
d. Real interest rates are now valued in nominal terms.
21.
____ In the long-run, what is likely to happen because of the changes in real interest rates in the
previous answer?
a. Investment (I) rises.
b. Investment (I) is unchanged.
c. Investment (I) falls.
22.
____ In the long-run, what is likely to happen because of the changes in real interest rates?
a. trade deficit (exports < imports).
b. Balanced trade (exports = imports).
c. trade surplus (exports > imports).
#’s 23 – 26. In the country of Absurdistan, the market for loanable funds is initially in equilibrium.
Absurdistan also has balanced trade (exports = imports). The Absudistani government is
also running a balanced government budget (taxes = government spending). Then, the
Absurdistani government decides to run large government deficits.
23.
____ Assume interest rates have not yet changed in reaction to the above changes in savings. What
condition will result in the loanable funds markets because of the changes above?
a. There will be a surplus of loanable funds.
b. The lonable funds market will stay in equilibrium as long as interest rates don’t change.
c. There will be a shortage of loanable funds.
24.
____ Now assume interest rates have been given enough time to change in reaction to the changes in
savings. In the long-run, what is likely to happen to real interest rates because of the changes above?
a. Real interest rates rise.
c. Real interest rates fall.
b. Real interest rates are unchanged.
d. Real interest rates are now valued in nominal terms.
25.
____ In the long-run, what is likely to happen because of the changes in real interest rates in the
previous answer?
a. Investment (I) rises.
b. Investment (I) is unchanged.
c. Investment (I) falls.
26.
____ In the long-run, what is likely to happen because of the changes in real interest rates?
a. trade deficit (exports < imports).
b. Balanced trade (exports = imports).
c. trade surplus (exports > imports).
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