homework 4
Quiz: homework 4 Page 1 of 9 homework 4 1. According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income. A. aggregate demand; aggregate supply B. aggregate supply; aggregate demand C. monetary policy; fiscal policy D. fiscal policy; monetary policy Answer: B 2. Exhibit: Keynesian Cross Reference: Ref 11-1 (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are: A. Y1 and PE1. B. Y2 and PE2. C. Y3 and PE3. D. Y3 and PE4. Answer: B 3. In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases the equilibrium level of income by ______. A. $1 billion B. $0.75 billion C. $3 billion D. $4 billion Answer: D 4. In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy: A. increases the amount of money in the economy. B. changes income, which changes consumption, which further changes income. http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 2 of 9 C. is government spending and, therefore, more powerful than private spending. D. changes the interest rate. Answer: B 5. 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. Answer: C 6. 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. Answer: B 7. Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(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. 200. B. 240. C. 250. D. 260. Answer: D 8. 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 Answer: D 9. The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A. lower the interest rate. B. raise the interest rate. C. have no effect on the interest rate. http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 3 of 9 D. first lower and then raise the interest rate. Answer: A 10. An explanation for the slope of the LM curve is that as: A. the interest rate increases, income becomes higher. B. the interest rate increases, income becomes lower. C. income rises, money demand rises, and a higher interest rate is required. D. income rises, money demand rises, and a lower interest rate is required. Answer: C 11. An LM curve shows combinations of: A. taxes and government spending. B. nominal money balances and price levels. C. interest rates and income, which bring equilibrium in the market for real money balances. D. interest rates and income, which bring equilibrium in the market for goods and services. Answer: C 12. 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. 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.) (Note: this short answer question is not graded.) HTML Editor Answer: Y = 2,800 – 400r or r = 7 – 0.0025Y. 13. In the question above, what is the slope of the IS curve? A. -0.0025 B. -0.025 C. 0.025 D. 0.0025 Answer: A 14. In the question above, if the level of G rises, how does this shift the IS curve? A. right (and up) B. left (and down) C. it does not shift http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 4 of 9 Answer: A 15. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.) (Note: this short answer question is not graded.) HTML Editor Answer: Y = 1,600 + 200r, or r = –8 + 0.005Y. 16. In the question above, what is the slope of the LM curve? A. 0.05 B. 0.005 C. -0.05 D. -0.005 Answer: B 17. In the question above, if M rises (and P remains fixed at P=1) how does the LM curve shift? A. it shifts right (down) B. it shifts left (up) C. it does not shift Answer: A 18. Using together the IS and LM equations you derived above, the equilibrium value of the interest rate is ____ and the equilibrium value of output is ____. A. 1, 2400 B. 2, 2400 C. 1, 2000 D. 2, 2000 Answer: D 19. Suppose now that the money supply is raised from 800 to 1100 in the economy described in the questions above. Assuming price is still fixed at P=1, the IS and new LM curve imply that the new equilibrium value of the interest rate is ____, and the new equilibrium value of output is ____. A. 1, 2400 B. 2, 2400 C. 1, 1600 D. 2, 1600 http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 5 of 9 Answer: A 20. The interaction of the IS curve and the LM curve together determine: A. the price level and the inflation rate. B. the interest rate and the price level. C. investment and the money supply. D. the interest rate and the level of output. Answer: D 21. In the IS–LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______. A. rises; falls B. rises; rises C. falls; rises D. falls; falls Answer: D 22. Using the IS–LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesiancross analysis. A. larger than the multiplier B. the same as the multiplier C. smaller than the multiplier D. sometimes larger and sometimes smaller than the multiplier Answer: C 23. If the demand for real money balances does not depend on the interest rate, then the LM curve: A. slopes up to the right. B. slopes down to the right. C. is horizontal. D. is vertical. Answer: D 24. According to the IS–LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply. A. increase B. decrease C. first increase and then decrease D. first decrease and then increase Answer: B 25. An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic “animal spirits”—will, within the IS–LM framework, ______ output and ______ interest rates. http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 6 of 9 A. increase; lower B. increase; raise C. lower; lower D. lower; raise Answer: B 26. An increase in the demand for money, at any given income level and level of interest rates, will, within the IS–LM framework, ______ output and ______ interest rates. A. increase; lower B. increase; raise C. lower; lower. D. lower; raise Answer: D 27. The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending. A. lower; raises; reduces B. higher; lowers; increases C. lower; lowers; increases D. higher; raises; reduces Answer: A 28. An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______. A. IS; shifts to the right B. IS; does not shift C. LM: shifts to the right D. LM; does not shift Answer: C 29. Exhibit: Short Run to Long Run http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 7 of 9 Reference: Ref 12-5 (Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. A. B; higher B. B; lower C. C; higher D. C; lower Answer: B 30. When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the: A. larger the level of government spending. B. smaller the level of government spending. C. greater the sensitivity of investment spending to the interest rate. D. smaller the sensitivity of investment spending to the interest rate. Answer: D 31. The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand. A. greater; greater B. greater; smaller C. smaller; smaller D. smaller; greater Answer: D 32. Other things equal, a given change in money supply has a larger effect on demand the: A. flatter the IS curve. B. steeper the IS curve. C. smaller the interest sensitivity of expenditure demand. D. larger the income sensitivity of money demand. Answer: A 33. If the investment demand function is I = c – dr and the quantity of real money demanded is eY – fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______. A. large; small B. small; small C. small; large D. large; large Answer: C 34. Those economists who believe that monetary policy is more potent than fiscal policy argue that the: http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 8 of 9 A. responsiveness of money demand to the interest rate is large. B. responsiveness of money demand to the interest rate is small. C. IS curve is nearly vertical. D. LM curve is nearly horizontal. Answer: B 35. Many people believe Europe has recently experienced a recession due to its policy of fiscal austerity. In the next several questions, use the IS-LM / AS-AD model to analyze the short run and long run effects of a permanent fall in government spending. (Note that in an exam, you would also be asked to provide a graph and verbal explanation.) What is the short run effect of a permanent cut in government spending on the interest rate: A. rise B. fall C. no change D. need more information to know Answer: B 36. In the scenario above, what is the short run effect of a permanent cut in government spending on investment: A. rise B. fall C. no change D. need more information to know Answer: A 37. In the scenario above, what is the short run effect of a permanent cut in government spending on real money demand: A. rise B. fall C. no change D. need more money to know Answer: C 38. In the scenario above, what is the short run effect of a permanent cut in government spending on nominal GDP: A. rise B. fall C. no change D. need more information to know Answer: B 39. Considering now the long-run effect of a permanent cut in government spending, which of the following variables returns in the long run to its initial value before the change in government spending? http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015 Quiz: homework 4 Page 9 of 9 A. both interest rate and investment B. neither interest rate nor investment C. just interest rate D. just investment Answer: B 40. Considering the long-run effect of the permanent cut in government spending, which of the following variables returns in the long run to its initial value before the change in government spending: A. both real GDP and nominal GDP B. neither real GDP nor nominal GDP C. just real GDP D. just nominal GDP Answer: C http://angel.bfwpub.com/section/content/default.asp?WCI=pgTool%5FQuiz%5FPreview&... 5/18/2015
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