Download Econ 2 UT3 F16 - Bakersfield College

Economics 2
Unit Test 3
Class Day and Time:
Name:
Part A. Answer the following 5 questions in the space provided. Each question is worth 4 points.
1. Using a table similar to the one used in class, show the effect of a $900 increase in government spending
in the Keynesian system. Show the effect on government, consumption, and GDP for each of three rounds
and what the total effect will be on each after all potential rounds are completed. Assume the marginal
propensity to consume (MPC) is 2/3 or 0.67 Also assume there is no crowding out. Illustrate the effect of
the first 2 rounds and the total effect after all the rounds are completed on an AD/AS diagram with a flat
SRAS curve. Be sure to write the amount of the change for each line shift on your diagram and the
amount of the total change.
2. Redo question 1 directly above, but this time assume there is complete crowding out and add a column for
change in investment. Illustrate the effect of the first 2 rounds and the total effect after all the rounds are
completed on an AD/AS diagram with a flat SRAS curve. Be sure to write the amount of the change for
each line shift on your diagram and the amount of the total change.
3. Use the aggregate demand and short-run aggregate supply curves to show the effect of
a perfectly predicted increase in the money supply on output and prices. Label the beginning
quantity Q1 and the quantity we move to Q2. If you think we will move to more than one
new quantity over time, label the successive quantities Q2, Q3 and so on. Do the same for
the price level, using P1, P2 and so on.
4. Use the aggregate demand and short-run aggregate supply curves to show the effect of
an unexpected increase in the money supply on output and prices. Label the beginning quantity Q1
and the quantity we move to Q2. If you think we will move to more than one new quantity over
time, label the successive quantities Q2, Q3 and so on. Do the same for the price level, using P1, P2
and so on.
5. Match up the belief with the school of macroeconomists most likely to believe it by writing its letter
in front of its belief.
A. Traditional Monetarist (Milton Friedman)
B. Market Monetarist (Scott Sumner)
C. Rational Expectationist Monetarist (Robert Lucus Jr.)
D. Keynesian (Barack Obama)
_______ The federal reserve board can not increase the money supply at the zero bound.
_______ The federal reserve board should commit to increasing AD by 5% a year no matter
what it takes.
_______ There are two Phillips curves, one before people catch on to higher inflation, and
another one after.
_______ The long-run often becomes the short-run.
Part B. State whether the following 2 statements are true, false, or uncertain, and explain your answer.
Each question is worth 4 points.
1. The fed finds it more difficult to increase the money supply when interest rates are near zero.
2. Lower interest rates will make people want to have more money in the cookie jar.
Part C. Answer the following 34 multiple choice questions by marking the letter of the best answer on
your scantron. Each question is worth 1 point.
1. The money supply is $8, quantity is 16, velocity is 4. What are prices?
a. $ 2
b. $ 3
c. $ 6
d. $ 8
2. According to the simple quantity theory of money, doubling the money supply:
a. causes quantity to double and prices to stay the same.
b. causes prices to double and quantity to stay the same.
c. causes both quantity and prices to double.
d. causes prices to double and quantity to increase by less than double.
3. The Fed creates bank reserves which the banks then lend out to customers. What happens?
a. Monetary base rises, but the money supply does not.
b. The money supply rises, but the monetary base does not.
c. Both the monetary base and money supply rise.
d. Neither the monetary base nor the money supply rise.
4. A tax cut with no crowding out is:
a. expansionary.
b. contractionary.
c. neither expansionary nor contractionary.
5. Why has the federal government run deficits 43 of the last 45 years?
a. Voters like to vote for politicians who promise more government help and lower taxes.
b. Because for 43 of the last 45 years, we have been in danger of falling into the recessionary gap and
so the proper Keynesian response is to run deficits.
c. Politicians are always telling lies to get elected.
d. Trick question – we have actually had government surpluses for more than half of the last 45 years.
6. If the fed creates more monetary base, and this does not cause higher inflation, then interest rates probably:
a. rise.
b. fall.
c. stay the same.
7. Which central bank has created more money over the last 6 years?
a. The federal reserve board of the United States.
b. The European central bank of many European countries, run primarily by Germany.
c. They’ve both created about the same amount of money.
8. If Keynesians pass a tax increase to do contractionary fiscal policy, what do they want the government to
do with the money that comes in?
a. Spend it on roads.
b. Destroy it.
c. Pay back some of the national debt.
d. Either a or c.
9. When the purchase price of a $100 bond falls, it’s interest rate has just:
a. risen.
b. fallen.
c. stayed the same.
10. What is the real rate of interest?
a. the inflation rate minus the nominal interest rate.
b. the nominal interest rate plus the inflation rate.
c. the nominal interest rate minus the inflation rate.
d. the nominal interest rate times the inflation rate.
11. Keynesians would propose contractionary fiscal policy:
a. if the economy is in a recessionary gap.
b. if the economy is in an inflationary gap.
c. as a stabilizing measure if the economy is in long-run equlibrium.
12. Which of the following combinations constitutes contractionary fiscal policy?
a. Increasing government spending and cutting taxes.
b. Cutting government spending and cutting taxes.
c. Increasing government spending and increasing taxes.
d. Cutting government spending and increasing taxes.
13. Which of the following would cause an increase in government expenditures financed by
borrowing to increase aggregate demand?
a. The government borrows money which had been in people’s cookie jars which they had not been
planning on spending.
b. The government borrows money from people they had been planning on spending on cars, which they
now do not buy.
c. The government borrows the money from banks, which now raise their interest rate, and in response
businesses cut back on their investment/expansion plans buy an equal amount.
d. Both b and c.
14. An expansionary fiscal policy will have a greater effect on Real GDP when there is:
a. incomplete crowding out.
b. complete crowding out.
c. zero crowding out.
15. If the MPC is 0.9, then a $100 increase in government spending financed by borrowing (with no
crowding out), causes GDP to rise by how much?
a. $0
b. $90
c. $100
d. $900
e. $1,000
16. When would the fed do expansionary monetary policy?
a. When the main problem facing the economy is a recession.
b. When the main problem facing the economy is inflation.
c. When the main problem facing the economy is we are producing at the natural real GDP.
17. What is expansionary monetary policy?
a. The fed taking steps to increase the money supply.
b. The fed taking steps to decrease the money supply.
c. The fed trying to maintain a steady money supply.
18. When there is unexpected inflation, which of the following is a loser?
a. People holding money.
b. Lenders
c. Borrowers
d. Both a and b.
19. Which behavior fits best with the rational expectations model?
a. People expect inflation next year to be what it was last year.
b. People read newspaper articles featuring economists’ predictions about inflation next year
based on current Federal Reserve policy.
c. Workers and bosses sign wage contracts with immediate raises tied to the government’s
announced CPI inflation statistics each month.
d. Both b and c.
20. If the SRAS curve is a line straight up and down (vertical), then increasing AD causes:
a. prices to rise, but not output.
b. output to rise, but not prices.
c. both output and prices to rise.
d. neither output nor prices to rise.
21. Which of the of following is a reason the government may not be able to use Keynesian fiscal
policy to fix the economy?
a. There could be lags gathering the necessary data, then further lags for Congress to pass the
program and then to move down the rounds of the Keynesian table.
b. Political fighting between the parties may keep Congress doing what Keynesians think is
correct.
c. Crowding out may keep the Keynesians policy from having the desired effect on aggregate
demand.
d. All of the above.
22. When is the SRAS curve likely to be vertical (straight up and down)?
a. When the economy has no unused resources for production
b. When the economy has very many unused resources for production.
c. When the economy has the natural level of unused resources for production.
d. Never.
23. What are on the axis of the Philips curve?
a. Price is on the horizontal axis and quantity is on the vertical.
b. Quantity is on the horizontal axis and price is on the vertical.
c. Inflation is on the horizontal axis and unemployment is on the vertical.
d. Unemployment is on the horizontal axis and inflation is on the vertical.
24. If people expect inflation to fall, then what happens to velocity?
a. rises.
b. falls.
c. stays the same.
25. During the Obama Keynesian stimulus years of 2009-2013, interest rates stayed very low. This is
a sign that:
a. crowding out was a significant problem and higher inflation was considered likely.
b. crowding out was a significant problem and higher inflation was not considered likely.
c. crowding out was not a significant problem and higher inflation was considered likely.
d. crowding out was not a significant problem and higher inflation was considered not likely.
26. When people become more worried they are not going to lose their jobs:
a. their demand for money increases.
b. their demand for money decreases.
c. their demand for money stays the same.
27. The Phillips curve of the 1960s was a line:
a. straight up and down.
b. straight flat across.
c. shaped like a slanted c.
d. that was straight and sloping down at a -45 degree angle.
28. If the government did not collect taxes but simply paid for its purchases by printing up money, this
would cause:
a. very high inflation.
b. very high unemployment.
c. both of the above.
d. none of the above.
29. The simple quantity theory of money is more accurate about the effect of an increase in the money
supply on prices when the increase in the money supply is:
a. large.
b. small.
c. doesn’t matter.
30. For the last 6 years, which is true?
a. The money supply and velocity both increased.
b. The money supply and velocity both decreased.
c. The money supply increased and velocity decreased.
d. The money supply decreased and velocity increased.
31. For the Great Depression in the early 1930’s, which is true?
a. The money supply and velocity both increased.
b. The money supply and velocity both decreased.
c. The money supply increased and velocity decreased.
d. The money supply decreased and velocity increased.
32. According to Milton Friedman, when people expect higher inflation,:
a. The Phillips curve moves outward (up and to the right).
b. The Phillips curve moves inward (down and to the left).
c. The Phillips curve stays where it is and we move along the Phillips curve to a position of higher
inflation and lower unemployment.
d. Nothing on the Phillips curve changes. The curve does not move, nor does our positon on the curve.
33. Why did the U.S. government go off the gold standard in 1933 during the Great Depression?
a. So the fed could print up more money.
b. People had lost confidence in gold.
c. Most of the other countries had already done so, so we had little choice.
d. Trick question – we did not go off the gold standard in 1933.