Other things being equal, all of the following government policies are likely to increase
national saving except:
A) decreasing taxes on savings accounts.
B) running a budget deficit.
C) running a budget surplus.
D) retiring part of the national debt.
Exhibit: IS”LM to Aggregate Demand
(Exhibit: IS“LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2
because the money supply decreases from M3 to M2 then, holding other factors
constant:
A) the aggregate demand curve will shift to the right.
B) the aggregate demand curve will shift to the left.
C) this represents a movement up the aggregate demand curve.
D) this represents a movement down the aggregate demand curve.
a. In April 1995, Michel Camdessus, managing director of the International Monetary
Fund (IMF), criticized U.S. economic policy for allowing the dollar exchange rate to
fall too low. He recommended that the United States reduce its budget deficit in order to
raise the exchange rate. Use the long-run model of a small open economy to illustrate
graphically the impact of reducing the government’s budget deficit on the exchange rate
and the trade balance. Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium values; iv. the direction the curves shift; and v. the new long-run
equilibrium values.
b. Based on your graphical analysis, explain whether Mr. Camdessus’s policy
recommendation will work. Specifically state what happens to the exchange rate and
the trade balance as a result of the government budget deficit reduction.
The slope of the IS curve depends on:
A) the interest sensitivity of investment and the amount of government spending.
B) the interest sensitivity of investment and the marginal propensity to consume.
C) the interest sensitivity of investment and the tax rates.
D) tax rates and government spending.
The time between when government spending increases and when aggregate demand
starts to increase is an example of an:
A) inside lag of monetary policy.
B) outside lag of monetary policy.
C) inside lag of fiscal policy.
D) outside lag of fiscal policy.
Exhibit: Residential Investment
(Exhibit: Residential Investment) Based on the graph, if the capital market is initially in
equilibrium at A with the relative price of housing equal to PH3/P and the stock of
housing capital equal to KH2, then holding other factors constant, an economic
recession that reduces national income will cause the relative price of housing to move
to ______ and the flow of residential housing to move to ______.
A) PH1/P; IH4
B) PH2/P; IH3
C) PH3/P; IH2
D) PH4/P; IH1
The preferences of households determine the:
A) reserve”deposit ratio.
B) currency”deposit ratio.
C) size of the monetary base.
D) loan”deposit ratio.
The quantity of money in the United States is essentially controlled by the:
A) President of the United States.
B) Department of the Treasury.
C) Federal Reserve.
D) system of commercial banks.
Assume that the consumption function is given by C = 200 + 0.5(Y ” T) and the
investment function is I = 1,000 ” 200r, where r is measured in percent, G equals 300,
and T equals 200.
a. What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G in
the equation Y = C + I + G and then write an equation for Y as a function of r or r as a
function of Y.) Express the equation two ways.
b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient
of Y when the IS curve is written expressing r as a function of Y.)
c. If r is one percent, what is I? What is Y? Ifr is 3 percent, what is I? What is Y? If r is
5 percent, what is I? What is Y?
d. If G increases, does the IS curve shift upward and to the right or downward and to the
left?
The strategic bequest motive hypothesizes that parents:
A) leave bequests to children because they care about their children’s well-being.
B) leave bequests to children who are borrowing-constrained.
C) make larger bequests the larger the quantity of taxes that will be shifted to their
children.
D) use the threat of disinheritance to control their children’s behavior.
The investment tax credit:
A) enables a firm to deduct a certain proportion of each dollar spent on capital goods
from its profits.
B) enables a firm to deduct a certain proportion of each dollar spent on capital goods
from its tax bill.
C) reduces the corporate tax rate in proportion to each dollar spent on capital goods.
D) allows a firm to count a certain proportion of each dollar spent on capital goods as
depreciation expense.
The marginal propensity to consume is:
A) normally expected to be between zero and one.
B) equal to consumption divided by disposable income.
C) normally assumed to decrease as disposable income increases.
D) normally assumed to increase as disposable income increases.
In the Mundell”Fleming model, the domestic interest rate is determined by the:
A) intersection of the LM and IS curves.
B) domestic rate of inflation.
C) world rate of inflation.
D) world interest rate.
The cost of capital for investment, if the price of capital goods rises with the price of
other goods and in the absence of taxes, may be summarized as the:
A) nominal interest rate plus the depreciation rate.
B) real interest rate plus the depreciation rate.
C) purchase price of a capital good multiplied by the sum of the nominal interest rate
plus the depreciation rate.
D) purchase price of a capital good multiplied by the sum of the real interest rate plus
the depreciation rate.
All of the following are a flow except:
A) the number of new automobile purchases.
B) the number of people losing their jobs.
C) business expenditures on plant and equipment.
D) the government debt.
When drawn on a graph with Y along the horizontal axis and PE along the vertical axis,
the line showing planned expenditure rises to the:
A) right with a slope less than one.
B) right with a slope greater than one.
C) left with a slope less than one.
D) left with a slope greater than one.
In a small open economy, if consumer confidence falls and consumers decide to save
more, then the real exchange rate:
A) rises and net exports fall.
B) and net exports both rise.
C) falls and net exports rise.
D) and net exports both fall.
In the steady state with no population growth or technological change, the capital stock
does not change because investment equals:
A) output per worker.
B) the marginal product of capital.
C) depreciation.
D) consumption.
The central bank in the United States is the:
A) Bank of America.
B) U.S. Treasury.
C) U.S. National Bank.
D) Federal Reserve.
The debt of the United States government is underreported in the view of many
economists because all of the following liabilities are excluded except:
A) future pensions of government employees.
B) debt owed to foreigners.
C) future Social Security benefits.
D) government guarantees of student loans.
If the Keynesian consumption function is written as then the average
propensity to consume is:
A) c.
B)
C)
D)
If the demand for money increases, but the Fed keeps the money supply the same, then
in the short run output will:
A) fall and in the long run prices will remain unchanged.
B) remain unchanged and in the long run prices will fall.
C) remain unchanged and in the long run prices will remain unchanged.
D) fall and in the long run prices will fall.
An increase in the interest rate:
A) reduces planned investment, because the interest rate is the cost of borrowing to
finance investment projects.
B) increases planned investment, because people who make money from interest have
more money to invest.
C) has no effect on investment.
D) may be caused by a drop in investment demand.
The quantity of coffee demanded, QD, depends on the price of coffee, Pc, and the price
of tea, PT. The quantity of coffee supplied, QS, depends on the price of coffee, Pc, and
the price of electricity, PE , according to the following equation:
QD = 17 ” 2 Pc + 10 PT
QS = 2 + 3 Pc ” 5 PE
a. If the price of tea is $1.00 and the price of electricity is $0.50, what is the equilibrium
price and quantity of coffee?
b. What is/are the endogenous variable(s) in this model?
c. What is/are the exogenous variable(s) in this model?
Milton Friedman argued that, over long periods of time, the average propensity to
consume is constant because, over these long periods of time:
A) the variation in income is dominated by the transitory component
B) the variation in income is dominated by the permanent component.
C) it is the behavior of the average consumer that dominates.
D) income averages out to a constant.
Exhibit: Output, Consumption, and Investment
In this graph, when the capital”labor ratio is OA, AB represents:
A) investment per worker, and AC represents consumption per worker.
B) consumption per worker, and AC represents investment per worker.
C) investment per worker, and BC represents consumption per worker.
D) consumption per worker, and BC represents investment per worker.
Stocks are:
A) loans to a firm.
B) assets minus liabilities of a firm.
C) leverage in a firm.
D) shares of ownership in a firm.
Unlike the long-run classical model in Chapter 3, the Solow growth model:
A) assumes that the factors of production and technology are the sources of the
economy’s output.
B) describes changes in the economy over time.
C) is static.
D) assumes that the supply of goods determines how much output is produced.
If s is the rate of job separation, f is the rate of job finding, and both rates are constant,
then the unemployment rate is approximately:
A) f/(f + s).
B) (f +s)/f.
C) s/(s + f).
D) (s + f)/s.
Protectionist policies implemented in a small open economy with a trade deficit have
the effect of ______ the trade deficit and ______ the quantity of imports and exports.
A) decreasing; decreasing
B) not changing; decreasing
C) decreasing; not changing
D) not changing; not changing