Practice Test for Exam 3 and Final Exam

Continuing from the previous question: But if the Fed does not intervene, the economy reaches ______.

A

Which of the following LRAS represents a Long Run Equilibrium?

A

Continuing from the previous question: After the change in the short run equilibrium, if the Fed intervenes in the market with the objective of closing the output gap, the economy reaches the point _____.

C

Natural rate of unemployment = 2.5%;Expected inflation = 2%The Long Run PC is a vertical line on ________ and a decrease in the Expected inflation to 0.5% would shift the PC to the ________.

a) 2.5%; left

Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more contractionary monetary policy?

a) 7% unemployment and 1% inflation

Starting at a point like C, what would happen in the AD-AS model when the GDP of Canada and Mexico is observing a boom period, i.e., their GDP has increased significantly. The short run equilibrium would shift from:

a) C to B

Continuing from the previous question: In the transition from short run to long run, the SRAS curve:

a) Shifts left due to an increase in PE

Starting from point Y, an increase in federal spending under balanced budget (does not affect savings of the government) would move the economy to which point in the short run?

a) V

Continuing from the previous question: Which point refers to the long run equilibrium (when there is increased government expenditure)?

a) X.

Starting at point A, a country decides to offer huge investment benefits. It would likely cause the interest rate to:

a) increase to 7%.

A tax cut shifts the aggregate demand curve the farthest if:

a) the MPC is large and if the tax cut is permanent.

If a $2,000 increase in income leads to an $1600 increase in consumption expenditures, then the marginal propensity to consume is:

b) 0.8 and the multiplier is 5.

If the Fed reduces inflation by 2 percentage point and this makes output fall 6 percentage points, the sacrifice ratio is

b) 3.

Suppose there is an increase in consumption. What would happen to the NCO and the Real Exchange Rate?

b) E increases; NCO decreases.

What is the impact of an increase in investment tax benefits on Exports?

b) Export decreases

What would happen in U.S. if there were new oil fields discovered off the coast of U.S. state of Georgia?

b) LRAS shifts right and stays at the new natural rate of output.

Suppose there is a tax increase. To stabilize output, the Federal Reserve could:

b) increase the money supply.

When the interest rate increases, the opportunity cost of holding money

b) increases, so the 'quantity' of money demanded decreases.

???Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $1,000 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $1,000 billion leftward shift?

b)By $600 billion

In a certain economy, when income is $100, and current consumer spending is $50. The value of the multiplier for this economy is 2. It follows that, when income is $120, consumer spending is? (HINT: Find MPC from the multiplier formula.)

c) 60.

Suppose an import tariff which reduces imports is removed. How does it affect real exchange rate (E) and real interest rate (r)?

c) E decreases and r remains unchanged.

The real interest rate is determined by the interaction of demand and supply of loanable funds. Initially, the real interest rate was at 4% as is shown in the diagram. Assume that the national savings is unchanged, whatsoever happens. If the new real interest rate is at 3%, what could have possibly occurred?

c) Government increase tax on capital income.

Classical Dichotomy and Money Neutrality implies:

c) Nominal variables like money does not affect real variables like real GDP in the long run.

When looking at a graph of aggregate demand, which of the following is correct?

c) There is nominal variable on the Y axis and real variable on the X axis.

A country had exports of $50 billion, imports of $70 billion, and domestic investment of $100 billion. Further, the government runs a budget deficit of $60 billion. What was the private saving during the year?

d) $140 billion

Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?

d) 3, 2, 1, 4

Impact of an increase in price level when everything less remains the same is a:

d) It is just a movement along the Aggregate Demand curve upwards

Refer to the Figure of Money Market of Auburn below. The money market diagram represents an increase in money demand. This could result from:

d) SkyBar stops accepting credit cards for entry and drinks.

To decrease the money supply, the Fed can:

d) all of the above (sell bonds, increase the reserve ration, and increase the federal funds rate)

??? In which of the following cases would the quantity of money demanded be smallest? HINT: What moves the "quantity" of money demanded and what moves the money demand curve?

d) r = 7% and P =2