1. In an economy with no foreign trade and a marginal propensity to consume of 0
ID: 1201485 • Letter: 1
Question
1. In an economy with no foreign trade and a marginal propensity to consume of 0.8, which of the following will be true?
a. If taxes are increased by $100M, GDP will decrease by $500M.
b. If autonomous consumption increases by $50M, GDP will increase by $200M.
c. If both taxes and government spending increase by $100M, GDP will increase by $250M.
d. If taxes are decreased by $100M, GDP will increase by $400M.
e. If autonomous consumption decreases by $100M, GDP will decrease by $800M.
2. Looking at the circular flows model, how can the saving equals investment equation be derived?
a. By looking at flows into and out of goods markets
b. By looking at flows into and out of financial markets
c. By looking at flows into and out of households
d. By looking at flows into and out of firms
e. By looking at flows into and out of the government
3. What will be the short-run effect of a 10% increase in the money supply for an economy operating in the Keynesian portion of the aggregate supply curve?
a. Real GDP will increase by 10% if velocity doesn’t change.
b. Real GDP and the price level will both increase by 5% if velocity doesn’t change.
c. Real GDP won’t change, but the price level will increase by 10% if velocity doesn’t change.
d. Velocity will fall by 5%, the price level will increase by 5%, and real GDP won’t change.
e. According to the quantity theory of money, velocity will fall by 10%, and nothing else will change
4. Which of the following will make monetary policy more effective in changing nominal GDP?
a. A fixed velocity of money
b. A flat investment demand curve
c. A high marginal propensity to save
d. A money demand curve that is very flat
e. An aggregate expenditure curve that is very flat
5. Given the nation has a capital account surplus and a federal budget deficit, which of the following is an effect of an increase in interest rates?
a. Lower structural unemployment
b. An increase in the trade deficit
c. Aggregate demand and aggregate supply will intersect in a steeper section of the aggregate supply curve
d. An outward shift in the production possibilities frontier
e. An inward shift of the consumption possibilities frontier
6. Which of the following pairs of actions suggest that fiscal policy and monetary policy are working in the same direction?
a. Taxes are lowered, and the discount rate is raised.
b. Government spending increases, and the Fed sells bonds on the open market.
c. Government spending and taxes increase by the same amount, and the required reserve ratio is increased.
d. Taxes are increased, and the Fed buys bonds on the open market.
e. Government spending and taxes decrease by the same amount, and the Fed sells bonds on the open market.
7. Which of the following is true if cyclical unemployment is high?
a. Velocity is low.
b. Monetary policy has little effect on the price level.
c. The marginal propensity to consume will be particularly high.
d. The country ’s currency has a low value in foreign exchange markets.
e. The Fed could bring the economy back toward full employment by selling bonds on the open market.
8. For the last several years, the money supply in the fictitious nation of Mauritania has been rising by 10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the money supply back to 3% annually. Which of the following statements regarding the effects of this action is true, ceteris paribus?
a. According to the quantity theory of money, inflation will be 1% in the next year.
b. According to the quantity theory of money, economic growth will slow down.
c. If the assumption of rational expectations holds, output will fall by 10% in the next year.
d. If the assumption of adaptive expectations holds, there will be no effect on output in the following year.
e. None of the above
Explanation / Answer
1. Option D is correct.
Tax multiplier = -MPC/1-MPC.
MPC = 0.8
Multiplier = -0.8/1-0.8 = -0.8/0.2 = 4.
So if taxes reduce by $100 million, the increase in GDP would be = $100*4 = $400 million.
2. Option B is correct.
This is so because households saves and their private savings are invested in financial market. The firms borrow money for investment from the financial market (where there is funds available due to savings of the households).
3. Option A is correct.
In the keynesian range of aggregate supply, the supply curve is very elastic and nearly horizontal to the x-axis, any increase in money supply would shift the AD curve to the right without increasing in price, the real GDP would increase.
4. Option A is correct.
The equation is given as M*V = P*Y where
M = money supply
V = velocity
P = price
Y = GDP.
If M increases, with V constant, Y would need to increase to maintain the equilibrium in the economy.
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