Download Problem Set 11

Problem Set 11
Econ 201 (03 and 04) Spring 2002
(Dr. Tin-Chun Lin)
1. A tax cut will
(A) Increase aggregate planned expenditure by causing disposable income to
increase.
(B) Increase aggregate planned expenditure by causing the interest rate to fall.
(C) Decrease aggregate planned expenditure by causing disposable income to fall.
(D) Decrease aggregate planned expenditure by causing the interest rate to rise.
(E) None of above.
(Answer: (A))
2. There will be no crowding out if
(A) The demand for real money is totally unresponsive to changes in the interest rate.
(B) The supply of real money is totally unresponsive to changes in the interest rate.
(C) Investment is totally unresponsive to changes in the interest rate.
(D) Investment is totally unresponsive to changes in real GDP.
(E) Investment is totally responsive to changes in the interest rate.
(Answer: (C))
3. In the first round following an expansionary fiscal policy, real GDP increases. In the
beginning of the second round, the demand for money
(A) Increases and the interest rate declines.
(B) Increases and the interest rate rises.
(C) Decreases and the interest rate declines.
(D) Decreases and the interest rate rises.
(E) Does not change and the interest rises.
(Answer: (B))
4. An increase in government expenditure to construct a new highway leads firms to
build new factories. This is an example of
(A) Crowding up.
(B) Crowding down.
(C) Crowding out.
(D) Crowding in.
(E) None of above.
(Answer: (D))
5. Monetary policy will have the smallest effect on aggregate demand when the
sensitivity of the demand curve for real money to the interest rate is
(A) Large and the sensitivity of the investment demand curve to the interest rate is
large.
(B) Large and the sensitivity of the investment demand curve to the interest rate is
small.
(C) Small and the sensitivity of the investment demand curve to the interest rate is
large.
(D) Small and the sensitivity of the investment demand curve to the interest rate is
small.
(E) None of above.
(Answer: (B))
6. The demand for real money will be more sensitive to the interest rate,
(A) The more people care about the timing of investment.
(B) The less people care about the timing of investment.
(C) The less substitutable other financial assets are for money.
(D) The less substitutable other consumption goods for investment.
(E) The more substitutable other financial assets are for money.
(Answer: (E))
7. The economies of two countries, Alpha and Beta, are identical in every way except
the following: In Alpha, a change in the interest rate of 1 percentage point (for
example, from 5% to 6%) results in a $1 trillion change in the quantity of real money
demanded. In Beta, a change in the interest rate of 1 percentage point results in a
$0.1 trillion change in the quantity of real money demanded.
a. In which economy does an increase in government purchases of goods and
services have a larger effect on real GDP? (Answer: Alpha)
b. In which economy is the crowding out effect weaker? (Answer: Alpha)
c. In which economy does a change in the money supply have a larger effect on
equilibrium real GDP? (Answer: Beta)
8. Aggregate demand can be increased by increasing the money supply (expansionary
monetary policy) or by increasing government purchases of goods and services
(expansionary fiscal policy). Which of the following is a correct comparison?
(A) The interest rate will rise under the monetary policy and fall under the fiscal
policy, while consumption will increase under both.
(B) The interest rate will fall under the monetary policy and rise under the fiscal
policy, while consumption will increase under both.
(C) Consumption will rise under the monetary policy and fall under the fiscal policy,
while the interest rate will increase under both.
(D) Consumption will rise under the monetary policy and fall under the fiscal policy,
while the interest rate will decrease under both.
(E) Consumption will rise under both policies, and the interest rate will decrease
under both.
(Answer: (B))
9. (True or False) Crowding out will be greater if the investment demand curve is very
steep. (Answer: False)
10. (True or False) Crowding in is the tendency for an expansionary fiscal policy to
decrease net exports. (Answer: True)