Fall 1996, University of Colorado at Boulder

Principles of Macroeconomics, Midterm 2

Vijaya Raj Sharma

MULTIPLE CHOICE

1.Given the full employment level of real GDP of $1500 and the MPC of 0.8, if the current GDP is $1000,

a. a classical economist shall recommend increasing government spending by $100 to restore the full employment level.

b. a new classical economist shall recommend increasing government spending by $500 to restore the full employment level.

c. a Keynesian economist shall suggest increasing government spending by $500 to restore full employment level.

d. a Keynesian economist shall suggest increasing autonomous investment by $100 to restore full employment level.

2. Let c=50+0.8 Y, I=50, G=50, and NX=-50, all in dollars. According to the Keynesian model, the current level of output in this economy is

a. $500.

b. $100.

c. $800.

d. $200.

3. Suppose you win the Colorado Lottery and begin to receive payments of $100,000 per year for 20 years. On the same day, your friend Sue receives a single payment of $100,000 as the result of a litigation settlement. According to the permanent income hypothesis,

a. both you and Sue will spend most of your new incomes on consumption.

b. you will spend most of your new income on consumption, whereas Sue will save most of her new income.

c. you will save most of your new income, whereas Sue will spend most of her new income on consumption.

d. both you and Sue will save most of your new incomes.

4. If the U.S. dollar appreciates relative to the German mark, and we assume Germany is a large trading partner of the U.S., we would expect in the short run U.S.

a. output and prices to increase.

b. output to increase and prices to decrease.

c. output to decrease and prices to increase.

d. output and prices to decrease.

5. Frictional unemployment means

a. there are not enough jobs to go around.

b. jobs are plentiful but workers scarce.

c. there is a decline in the demand for labor in the aggregate, due to recessionary tendencies in the economy.

d. imperfect information prevents qualified workers from matching up with the available jobs.

6. Potential GDP

a. is always less than actual GDP.

b. is identical to actual GDP.

c. minus actual GDP measures the loss of production as the result of inflation.

d. measures the output an economy could reasonably be expected to produce at full employment, under normal circumstances.

7. Economists usually use the term "recession" to refer to

a. a slowdown in the growth of real GDP.

b. zero real GDP growth.

c. two or more consecutive quarters of declining real GDP.

d. a reduction in nominal GDP lasting more than six months.

8. A general mismatch between the skills of unemployed workers and the skills needed by employers with job openings results in

a. frictional unemployment.

b. structural unemployment.

c. cyclical unemployment.

d. a higher labor force participation rate.

9. The unemployment rate equals the number of persons

a. unemployed divided by the number employed.

b. unemployed divided by the number in the labor force.

c. unemployed divided by the population age 16 and over.

d. not working divided by the population age 16 and over.

10. If the money interest rate is 8 percent and the inflationary premium 3 percent, then the real interest rate is

a. -5 percent.

b. 3 percent.

c. 5 percent.

d. 11 percent.

11. In our standard AD-AS model framework, which of the following is true?

a. The aggregate quantity demanded of goods and services relates directly to prices.

b. In the short run, the aggregate supply curve slopes upward to the right, but in the long run it is vertical.

c. In the short run, the aggregate supply curve is vertical; in the long run, it slopes upward to the right.

d. The aggregate quantity supplied of goods and services slopes downward to the right.

12. The primary difference between the aggregate demand curve and the demand curve for any ordinary good is that the AD curve

a. isn't always downward sloping.

b. relates aggregate quantity demanded to interest rather than the price of goods.

c. relates aggregate quantity demanded to the average level of all prices, while an ordinary demand curve relates quantity demanded to the price of a specific good.

d. relates output to income rather than quantity demanded to price.

13. In the AD/AS model, the aggregate demand for goods and services is composed of the purchases of

a. households and foreigners (net exports).

b. businesses, bondholders, and foreigners (net exports).

c. businesses and governments.

d. consumers, investors, governments, and foreigners (net exports).

14. In the context of aggregate supply, the short run is defined as the period during which

a. some prices are set by contracts and cannot be adjusted.

b. prices can change, but neither aggregate supply nor aggregate demand can shift.

c. individuals have sufficient time to modify their behavior in response to price changes.

d. quantity changes cannot occur in response to changes in relative prices.

15. Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?

a. a decrease in inflation

b. a decrease in unemployment

c. an increase in prices

d. an increase in the natural unemployment

16. Which of the following will most likely accompany an unanticipated increase in aggregate demand?

a. a decrease in prices

b. a decrease in resource prices

c. an increase in real GDP

d. an increase in unemployment

17. Within the Keynesian model, if an economy operates below full employment,

a. a reduction in wage rates and resource prices will soon restore full employment equilibrium.

b. a reduction in the real interest rate will soon restore full-employment equilibrium.

c. an increase in the real interest rate will soon restore full-employment equilibrium.

d. the economy may remain below full employment for a long time unless aggregate demand increases.

18. If the marginal propensity to consume (MPC) is 0.6, what is the income multiplier?

a. 0.4

b. 0.6

c. 1.4

d. 2.5

19. The crowding-out effect suggests that

a. expansionary fiscal policy causes inflation.

b. restrictive fiscal policy is an effective weapon against inflation.

c. reduction in private spending resulting from the higher interest rates caused by a budget deficit will largely offset the expansionary impact of a pure fiscal action.

d. a budget surplus will cause the private demand for loanable funds, the interest rate, and aggregate demand to fall.

20. The new classical model implies that substitution of debt for tax financing

a. increases aggregate demand and exerts a multiplier effect leading to an expansion in real output.

b. is highly effective against inflation.

c. reduces consumption because it increases both the current and future tax liability of households.

d. leaves aggregate demand unchanged since the debt implies higher future taxes.

21. Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

a. expansionary fiscal policy.

b. new classical fiscal policy.

c. supply-side fiscal policy.

d. counter-cyclical fiscal policy.

22. Which of the following is primarily responsible for controlling the money supply in the United States?

a. the U.S. Congress

b. the Council of Economic Advisors

c. the U.S. Treasury

d. the Board of Governors of the Federal Reserve System

23. A reserve requirement of 25 percent implies a potential money multiplier of

a. 4.

b. 5.

c. 20.

d. 25.

24. Fiat money is money

a. used in Italy.

b. backed by gold only.

c. used in old days.

d. that has little intrinsic value.

25. Which of the following correctly identifies the three reasons why people hold money?

a. transaction demand, precautionary demand, speculative demand

b. money demand, transaction demand, income demand

c. consumption demand, investment demand, transaction demand

d. money demand, wealth demand, income demand

26. An increase in the nominal interest rate would

a. encourage people to hold smaller money balances.

b. encourage people to hold larger money balances.

c. force the Fed to reduce the money supply.

d. cause the real interest rate to decline.

27. The equation of exchange states that

a. money supply multiplied by nominal GDP equals velocity.

b. velocity multiplied by money supply equals nominal GDP.

c. money supply divided by velocity equals nominal GDP.

d. money supply divided by velocity equals real GDP.

28. Lenders must charge an inflation premium to

a. protect themselves from future price reductions.

b. ensure that the money interest rate remains stable during inflationary periods.

c. reduce the real interest rate that the borrower must pay.

d. protect themselves from a decline in the purchasing power of the dollar.

29. Which of the following best describes the central Keynesian view of the interrelationships among total output, spending, and the general level of prices?

a. Prices decrease until full employment is reached; at this point, any additional spending is inflationary.

b. Output, spending, and prices all increase in specific proportion.

c. For a time, spending increases will cause large increases in output with little or no increases in prices; however, as full employment is approached or exceeded, prices begin to rise more rapidly.

d. Spending and output are directly related, but spending and prices are related inversely.

30. If a reduction in the money supply were desired as part of an anti-inflation policy, the Federal Reserve might

a. decrease the reserve requirements.

b. buy U.S. securities on the open market.

c. raise the discount rate.

d. buy U.S. securities directly from the Treasury.

31. The pre-1930 classical economists who believed in the quantity theory of money thought the primary effect of an increase in the money supply would be a(n)

a. increase in real GDP.

b. reduction in velocity.

c. decrease in unemployment.

d. proportional increase in prices.

32. Use the following diagram to answer this question. Starting from long-run equilibrium at point A, at which of the following points would short-run equilibrium occur immediately following a decline in the real interest rate?

a. A

b. B

c. C

d. D