EC309 Multiple Choice Final Exam Answers (Chapter 12)
In the Keynesian-cross model, actual expenditures equal: A) GDP. B) the money supply. C) the supply of real balances. D) unplanned inventory investment.
A) GDP.
The IS curve slopes downward because a ______ interest rate reduces ______ and thus income. A) higher, planned investment B) higher, money demand, C) lower, planned investment D) lower, money demand
A) higher, planned investment
The IS-LM model is generally used: A) only in the short run. B) only in the long run. C) both in the short run and in the long run. D) in determining the price level.
A) only in the short run.
The IS curve shifts when any of the following economic variables change EXCEPT: A) the interest rate. B) government spending. C) taxes. D) the marginal propensity to consume.
A) the interest rate.
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 70 B) 120 C) 170 D) 220
A) 70
According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by: A) 0 B) 100 C) 150 D) 250
B) 100
The LM curve slopes upward because ______ income increases money ______ and, in turn, the interest rate A) higher, supply B) higher, demand C) lower, supply D) lower, demand
B) higher, demand
According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
B) increase; decrease
When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce production. C) hire more workers and increase production. D) call for more government spending.
B) lay off workers and reduce production.
If the interest rate is above the equilibrium value, the: A) demand for real balances exceeds the supply. B) supply of real balances exceeds the demand. C) market for real balances clears. D) demand for real balances increases.
B) supply of real balances exceeds the demand.
According to the theory of liquidity preference, the central bank can increase the ______ of money and ______ the interest rate. A) supply, raise B) supply, lower C) demand, raise D) demand, lower
B) supply, lower
Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that: A) government spending increases the MPC more than tax cuts. B) the government-spending multiplier is larger than the tax multiplier. C) government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. D) increases in government spending increase planned spending, but tax cuts reduce planned spending.
B) the government-spending multiplier is larger than the tax multiplier.
According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a tax cut of $120 billion increases equilibrium income by _____ billion. A) $160 B) $180 C) $240 D) $360
C) $240
Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000 B) 1,800 C) 1,600 D) 1,400
C) 1,600
The IS and LM curves together generally determine: A) income only. B) the interest rate only. C) both income and the interest rate. D) income, the interest rate, and the price level.
C) both income and the interest rate.
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will: A) decrease equilibrium income by ΔT. B) decrease equilibrium income by ΔT / (1 - MPC). C) decrease equilibrium income by ΔT (MPC) / (1 - MPC). D) not affect equilibrium income at all.
C) decrease equilibrium income by ΔT (MPC) / (1 - MPC).
Along an IS curve all of these are always true EXCEPT: A) planned expenditures equal actual expenditures. B) planned expenditures equal income. C) the demand for real balances equals the supply of real balances. D) there are no unplanned changes in inventories.
C) the demand for real balances equals the supply of real balances.
At the intersection of the IS and LM curves, A) the economy is at full employment. B) the economy has the right balance of inflation and unemployment. C) the goods market and money market are both in equilibrium. D) the goods market disequilibrium offsets the money market disequilibrium.
C) the goods market and money market are both in equilibrium.
The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances A) inflation and unemployment B) the price level and real output C) the interest rate and the level of income D) the interest rate and real money balances
C) the interest rate and the level of income
According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by _____ billion. A) $160 B) $180 C) $240 D) $360
D) $360
An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income. A) increases; downward B) increases; upward C) decreases; upward D) decreases; downward
D) decreases; downward
The LM curve, in the usual case: A) is vertical. B) is horizontal. C) slopes down to the right. D) slopes up to the right.
D) slopes up to the right.
A decrease in the nominal money supply, other things being equal, will shift the LM curve: A) upward and to the right. B) downward and to the right. C) downward and to the left. D) upward and to the left.
D) upward and to the left.
