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ECON 2030
First Hour Exam
Any Semester
Pentamber 32, 2001
Prof. Roger W. Garrison
5. In the Keynesian view, the most unstable,
or unpredictable, component of spending is
that done by
A. consumers.
B. the investment community.
C. unemployed workers.
D. the government.
27. “Who You Gonna Call After the Next Bust?” Louis
Uchitelle argues that for macroeconomic stabilization,
we will–and should–call on
A. the government.
B. industrial leaders.
C. citizen action groups.
D. academic economists.
9. During this election year, Prophetess Mary is
earning a fairly good income, partly by making
predictions about the outcome of the Bush-Gore
race for the presidency. She will earn about
$15,000 this year, out of which she’ll spend about
$12,500. Next year, with no election to stimulate
her business, her income may fall to $10,000, out
of which she may spend $9,500. On the basis of
these data (and assuming no taxes), we can
calculate that Prophetess Mary’s marginal
propensity to consume (MPC) is
A. 0.85.
B. 0.75.
C. 0.80.
D. 0.60.
C
12,500
9,500
C = a+bY
3,000
5,000
10,000 15,000
Y
MPC = b = slope = 3,000 / 5,000 = 0.60
9. During this election year, Prophetess Mary is
earning a fairly good income, partly by making
predictions about the outcome of the Bush-Gore
race for the presidency. She will earn about
$15,000 this year, out of which she’ll spend about
$12,500. Next year, with no election to stimulate
her business, her income may fall to $10,000, out
of which she may spend $9,500. On the basis of
these data (and assuming no taxes), we can
calculate that Prophetess Mary’s marginal
propensity to consume (MPC) is
A. 0.85.
B. 0.75.
C. 0.80.
D. 0.60.
10. But suppose Prophetess Mary’s Bush-Gore
predictions turn out to be exactly wrong, and her
business dries up completely. Even with her
income dropping (temporarily, she hopes) to zero
in 2001, she will engage in consumption spending
(symbolized by “a”) in the amount of
A. $2,500.
B. $3,000.
C. $3,500.
D. $4,000.
C
C = a+bY
12,500
9,500
3,000
MPC = b = slope = 0.60
5,000
a = 3,500
10,000 15,000
C = a + bY
9,500 = a + 0.6 (10,000)
a = 9,500 – 6,000
a = 3,500
Y
10. But suppose Prophetess Mary’s Bush-Gore
predictions turn out to be exactly wrong, and her
business dries up completely. Even with her
income dropping (temporarily, she hopes) to zero
in 2001, she will engage in consumption spending
(symbolized by “a”) in the amount of
A. $2,500.
B. $3,000.
C. $3,500.
D. $4,000.
The two diagrams
show the savinginvestment relationships for a wholly
private economy as
seen by Marshallians, who believe
that markets work,
and by Keynesians,
who believe that
perversities are
especially dominant
in this market.
Note that Saving (S) and Investment
(I) are measured horizontally in one
diagram and vertically in the other.
Answer Questions 11 through 16
with the aid of these diagrams.
11. The Marshallians
don’t explicitly show
the level of income.
Their presumption,
however, is that
A. economic depression is the norm.
B. The whole labor force earns the minimum wage.
C. full employment is achieved by wage-rate adjustments.
D. government policy will create and maintain a fully
employed economy.
12. Suppose that
income earners
become more thrifty.
The increased saving,
in the Marshallian
view, will cause
S’
A. the interest rate to fall and investment to increase.
B. the interest rate to rise and investment to increase.
C. the interest rate to fall and investment to decrease.
D. the interest rate to rise and investment to decrease.
13. The Keynesian
diagram shows that
equilibrium income
equals full-employment
income, i.e., Yeq = Yfe.
For a wholly private
economy, this equality,
according to the
Keynesians
A. must be true by definition.
B. can only be the result of accident.
C. is brought about by market forces.
D. is possible only if saving equals zero.
S’
14. The Keynesians
would claim that a shift
in the saving function in
the direction of
increased thrift will
cause
A. the interest rate to fall and investment to increase.
B. income to rise and investment to increase.
C. both income and investment to remain unchanged.
D. income to fall but investment to remain unchanged.
16. According to the
Keynesians, the saving
function
A. is unstable.
B. is as stable as the consumption function.
C. shifts with changes in the rate of interest.
D. is usually steeper than the consumption function.
15. If, with Yeq = Yfe,
investment increases,
the Keynesians would
expect to see
A. sustainable increases in real output and real income.
B. inflation but no sustained increase in real output.
C. overall decreases in prices and wage rates.
D. an increase in full-employment income.
6. In about the middle of each month, the BLS
releases the new CPI data. CPI stands for
A. consumer price index, which, over time, tracks the
economy’s inflation rate.
B. commercial production index, which tracks the
economy’s marketable output.
C. consumer price index, which measures the extent
of monopoly power in the business community.
D. commercial production index, which measures the
extent of inventory excesses or inventory
deficiencies.
Consider the mixed
economy of Colandia.
The government collects
no taxes even though it
spends $50 per year.
Investment spending is
also $50. The marginal
propensity to consume
in Colandia is 5/8.
Full-employment
income is estimated to
be $640. (All figures are
in billions of dollars, but
you can dispense with
the nine zeroes.)
T=0
G = 50
I = 50
b = 5/8
Answer Questions 17 through
25 on the basis of these data and
the information depicted in the
diagram.
17. According to the
diagram, how much do
the Colandians spend on
consumption goods even
when their incomes fall
(temporarily) to zero?
A. $0.
B. $50.
C. $100.
D. $150.
18. What is the marginal
propensity that
characterizes the
Colandians’ saving
behavior?
A. MPS = 5/8.
B. MPS = 1/2.
MPC = b = 5/8
C. MPS = 3/8.
MPS = 1 - b = 1 - 5/8
D. MPS = 1/4.
MPS = 3/8
19. What equation
describes the saving
behavior of the
Colandians?
A. S = -50 + 3/8 Y.
B. S = 50 + 5/8 Y.
C. S = -150 + 5/8 Y.
C = a + bY
D. S = 150 + 3/8 Y.
S = -a + (1 - b)Y
S = -50 + 3/8 Y
20. At what level of
income would
Colandians spend $450
on consumption goods?
A. $560.
B. $640.
$450
C = 50 + 5/8 Y
C. $720.
450 = 50 + 5/8 Y
D. $800.
5/8 Y = 400
Y = 640
$160
21. How much will
Colandians save when
their income is $560?
A. -$50.
B. $0.
C. $60.
S = - 50 + 3/8 Y
D. $160.
S = -50 + 3/8 (560)
S = -50 + 210
S = 160
22. How much are total
expenditures (C + I + G)
in Colandia when
income is $560?
$500
A. $400.
B. $450.
E=C+I+G
C. $500.
E = 50 + 5/8 Y + 50 + 50
D. $550.
E = 150 + 5/8 (560)
E = 150 + 350 = 500
$60
23. With income at $560,
what is the extent of the
excess or depletion of
inventories?
A. excess inventories in the amount of $60.
B. excess inventories in the amount of $160.
C. depletion of inventories in the amount of $60.
D. depletion of inventories in the amount of $160.
24. Where is the
equilibrium that the
spiraling of income and
expenditures will bring
about in Colandia?
A. Yeq = $400.
Y=C+I+G
B. Yeq = $480.
Y = 50 + 5/8 Y + 50 + 50
C. Yeq = $560.
Y - 5/8 Y = 150
D. Yeq = $640.
3/8 Y = 150; Y = 400
25. How much will the
Colandians be saving
when the Keynesian
adjustments have
established an
equilibrium?
A. $0.
B. $50.
C. $100.
D. $150.
$100
S = - 50 + 3/8 Y
S = -50 + 3/8 (400)
S = -50 + 150
S = 100
7. Keynesian policy advisors might
recommend a general tax cut if they
believe the economy is experiencing
A. inflation.
B. frictional unemployment.
C. cyclical unemployment.
D. structural unemployment.
8. If a mixed economy that operates in accordance
with the Keynesian vision settles into a circular flow
in which tax revenues equal government spending and
saving equals investment, we can say that
A. the marginal propensity to save is equal to zero.
B. the economy is in Keynesian equilibrium but may
be in a depression.
C. the marginal propensity to save is equal to the
marginal propensity to consume.
D. the economy is experiencing neither cyclical
unemployment nor inflation.
Full-employment
income in Algoria is
estimated to be $8,500,
but the equilibrium
level of income is only
$7,600. (These figures
are in millions of
dollars.) On average,
when Algorians earn an
additional three dollars
of income, they spend
two and save one.
Answer the next three
questions on the basis
of this information.
30. If government spending
is used to achieve full
employment in Algoria, by
how much would government spending have to be
increased?
A. $150.
B. $300.
C. $450.
D. $900.
/\Y = 1/(1-b) /\G
900 = 3 /\ G
/\ G = 300
Full-employment
income in Algoria is
estimated to be $8,500,
but the equilibrium
level of income is only
$7,600. (These figures
are in millions of
dollars.) On average,
when Algorians earn an
additional three dollars
of income, they spend
two and save one.
Answer the next three
questions on the basis
of this information.
31. If, instead, policy makers
choose to use tax policy to
achieve full employment in
Algoria, by how much
would taxes have to be cut?
A. $150.
B. $300.
C. $450.
D. $900.
/\ Y = -b/(1-b) /\ T
900 = -2 /\ T
/\T = -450
32. Suppose that the Algorian government is moved by the
spirit of fiscal integrity, which requires that all changes in
government spending be accompanied dollar-for-dollar by
changes in the level of taxation. With this constraint in
place, how could full employment without inflation be
achieved?
A. Increase both government spending
and the level taxation by $450.
B. Decrease both government spending
and the level taxation by $450.
C. Increase both government spending
and the level taxation by $900.
D. Decrease both government spending
and the level taxation by $900.
29. Consider a typical dispute between conservative and notso-conservative politicians during a period in which the
economy is experiencing full employment without inflation.
The conservative politicians, who tend to think in terms of
supply and demand rather than income and expenditures,
recommend that the government reduce both government
spending and the level of taxation by $100 billion so the
private sector will have a greater role in allocating the
economy’s resources. The not-so-conservative politicians, who
seriously doubt the ability of the market to function on its
own, claim that this policy would cause both output and
income to
A. fall by $100 billion.
C. remain unchanged.
B. rise by $100 billion.
D. fall by more than $100 billion.
28. Government-spending policy and tax policy can be
used as alternative means of stimulating the economy.
Suppose that, in a very stimulant-sensitive economy, an
increase in government spending of $45 billion would
raise income by $450 billion. That same increase in
income could be achieved by implementing a tax cut of
A. $40 billion.
B. $45 billion.
/\ Y = 1/(1-b) /\ G
450
=
1/(1-b)
45
C. $50 billion.
D. $55 billion. 1/(1-b) = 450/45 = 10
-b/(1-b) = -9
Go to Colandia
/\Y = -b/(1-b) /\T
450 = -9 /\ T
/\T = 450/(-9)
/\T = -50