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Lahore School of Economics
Winter Term, 2010
BSc II – Sec B
Macroeconomics I
Practice MCQs for Mid-Term
1.
a.
b.
c.
d.
e.
Which of the following identities is FALSE?
Y = C + I + G + NX
YD = Y – TA + TR
BS = TA – TR – G
I – S = (G – TA + TR) + NX
S + TA – TR = I + G + NX
2. Assume that GDP = 8100, C = 5400, Gross private domestic investment = 1200, G =
1600. Which of the following is true?
a. imports exceed exports by 100
b. exports exceed imports by 100
c. depreciation is 100
d. trade surplus is 100
e. both b. and d.
3. Assume the budget deficit decreased by Rs.15 billion. Private savings decrease by Rs.20
billion, exports increased by Rs.10 billion and imports increased by Rs.15 billion. By how
much did investment change?
a. the investment decreased by Rs.10 billion
b. the investment increased by Rs.10 billion
c. the investment did not change at all
d. the investment decreased Rs.20 billion
e. the change in investment cannot be determined from the information
4.
a.
b.
c.
d.
e.
Assume the budget deficit increases. Which of the following can happen?
private domestic saving can increase
domestic investment can decrease
imports can increase
exports can decrease
all of the above
5. Assume there is an increase in budget surplus. Which of the following is likely to
happen?
a. imports will increase more than exports.
b. exports will increase more than imports
c. private savings will increase more than investment
d. investment will remain the same while private saving will increase
e. investment will decrease
6. Assume nominal GDP was Rs8 trillion in year 1 and Rs8.8 trillion in year 2. If year 1 is
the base year, then
a.
b.
c.
d.
e.
the GDP deflator is 110
prices increase on average by 10%
real GDP has not changed
none of the above is true
both a. and b. are true, but only if c. is true
7. Assume a model with no government or foreign sector. If actual investment is Rs10
billion while planned investment is Rs20 billion, we know that
a. unintended investment = - Rs10 billion
b. unintended investment = + Rs10 billion
c. unintended investment = + Rs30 billion
d. the income level is above its equilibrium
e. there is an excess supply of goods and services
8. In a simple model with no government or foreign sector, a decline in investment of Rs10
will lead to a Rs50 decline in the equilibrium level of income if
a. the mps is 0.2
b. the mpc is 0.5
c. ration of total consumption to total income is 0.8
d. changes in consumption divided by changes in income = 0.2
e. changes in savings divided by changes in income = 0.8
9. Assume a model with no foreign sector, and income tax rate of 0, and a consumption
function defined as C = 400 + (0.75)YD. If government transfer payments decrease by
200, income will
a. decrease by 600
b. decrease by 800
c. increase by 800
d. increase by 600
e. increase by 150
10. Assume an economy with no foreign sector, an mps = 0.1 and t = 1/3. Assume that
government transfer payments decrease by 200. Which of the following is true?
a. national income will decrease by 450
b. tax revenues will decrease by 150
c. the budget surplus will increase by 50
d. consumption will decrease by 450
e. all of the above
11. Assume S = - 100 + (0.2)YD and the ‘t’ = 0.25. What would be the effect on equilibrium
income of a decrease in autonomous consumption of 50?
a. a decrease in income of 400
b. a decrease in income of 250
c. a decrease in income of 100
d. a decrease in income of 125
e. a decrease in income of 100
12. In a model with income taxes, assume that autonomous investment decreases. Which of
the following will be true?
a. the full employment budget surplus will decline
b.
c.
d.
e.
the actual budget surplus will decrease
the cyclical component of the budget surplus will decrease
the budget surplus will remain unaffected
both b. and c.
13. If the full-employment budget surplus is positive but the actual budget surplus is
negative, what can we conclude?
a. nothing
b. that saving exceeds investment
c. that the economy is in a boom
d. that fiscal policy is too restrictive
e. that fiscal is too expansionary
14.
a.
b.
c.
d.
e.
If investment becomes more responsive to changes in the interest rate, then
the size of the expenditure multiplier will increase
income will increase more with any increase in the interest rate
the IS curve will become flatter
the IS curve will become steeper
both a. and c.
15.
a.
b.
c.
d.
e.
Which of the following will not cause a shift of the IS curve?
an increase in transfer payments
a decrease in taxes
a change in money demand
a change in business and consumer confidence
a change in autonomous spending
16.
a.
b.
c.
d.
e.
If there is an increase in income tax rate, then the IS curve will
become flatter and shift to the right
become steeper and shift to the left
become steeper and shift to the right
shift parallel to the left
shift parallel to the right
17.
a.
b.
c.
d.
e.
The LM curve becomes steeper if
money demand becomes less sensitive to changes in the interest rate
money demand becomes more sensitive to changes in the interest rate
investment becomes more sensitive to changes in the interest rate
investment becomes less sensitive to changes in the interest rate
money demand becomes less sensitive to changes in income
18.
a.
b.
c.
d.
e.
In an IS-LM framework, a decrease in autonomous saving
decrease income, but increases the interest rate
decreases both income and money demand
decreases both income and the interest rates
increases both income and the interest rates
shifts the LM curve to the left
19. Monetary policy becomes more effective as
a. the interest sensitivity of investment increases
b.
c.
d.
e.
money demand becomes less sensitive to changes in the interest rate
mps decreases
the tax rate decreases
all of the above
20.
a.
b.
c.
d.
e.
The monetary policy multiplier is large if
the LM curve is steep and IS curve is flat
the LM curve is flat and IS curve is steep
money demand is very sensitive to interest rate
investment is very interest insensitive
both money supply and money demand are very interest sensitive
21.
a.
b.
c.
d.
e.
An increase in the fiscal policy multiplier can be caused by
an increase in the interest sensitivity of investment
an increase in the interest sensitivity of money demand
a decrease in the interest sensitivity of money demand
an increase in the income tax rate
a decrease in autonomous saving
22.
a.
b.
c.
d.
e.
The slope of the AD curve will become flatter if
money demand becomes more income inelastic
money demand becomes more interest elastic
investment becomes more interest elastic
both a. and c.
both b. and c.
23.
a.
b.
c.
d.
e.
Monetary policy becomes more effective as
the marginal propensity to save increases
the interest sensitivity of money demand increases
the interest sensitivity of investment decreases
the income tax rate decreases
none of the above
24.
a.
b.
c.
d.
e.
When the LM is vertical, then
the monetary policy multiplier is zero
monetary policy is at its weakest but fiscal policy has a maximal effect
monetary policy has a maximal effect, but fiscal policy has no effect on income
fiscal policy’s impact on interest rates will not affect investment
monetary policy affects interest rates but no change in investment spending results
25.
a.
b.
c.
d.
e.
If investment is very interest insensitive, then
the fiscal policy will be largely ineffective
monetary policy will be very effective
the economy will be in the classical case
monetary policy cannot be used to lower interest rates
expansionary fiscal policy ill not crowd out much private spending
26. Assume the government implements a spending cut and the State Bank responds by
increasing money supply. Which is MOST likely to occur?
a. lower interest rates and a higher budget surplus
b.
c.
d.
e.
lower interest rates and a higher budget deficit
a decrease in investment and net exports
a higher budget surplus and lower tax revenues
both a. and d.
27. Assume the government wants to keep the income roughly the same but change the
composition of output from consumption towards investment. Which policy mix do you
suggest?
a. a decrease in transfer payments to households combined with open market
purchases by the State Bank
b. a cut in income taxes combined with open market sales by the State Bank
c. expansionary fiscal policy combined with restrictive monetary policy
d. a reduction in investment tax credits
e. a reduction in the income tax rate
28. In a normal IS-LM framework, if government purchases and taxes are both increased by
the same amount, then
a. income will increase by exactly that amount
b. income will remain the same since IS curve is unaffected
c. income will only increase if State Bank also increases money supply
d. income and the interest rate will both increase
e. income will remain the same, but consumption will decrease
29. In an IS-LM model, if we change from a closed economy where NX = 0 to an open
economy where NX = NX0 – mY (where m > 0), then
a. the IS curve will become steeper and shift to left
b. the IS curve will become flatter and shift to right
c. the LM curve will become steeper and shift to left
d. the LM curve will become steeper and shift to right
e. the fiscal policy multiplier will become larger
30.
a.
b.
c.
d.
e.
In a normal IS-LM framework, crowding out may be avoided if
banks ration credit
the government matches a tax increase with an increase in government purchases
the State Bank increases money supply to accommodate fiscal expansion
the Sate Bank sells government bonds on a large scale
both c. and d.