TOBB-ETU, Economics Department

Macroeconomics I (IKT 233)

Summer 2011-Ozan
Practice Questions (for Final)
9. CHAPTER: Aggregate Demand I
1-) A change in endogenous variables usually results in a shift ... the curve, while a change
in exogenous variables usually results in a shift ... the curve.
a-) of; along
b-) along; of
2-) In the long run, the level of output is determined by the:
a-) interaction of supply and demand
b-) money supply and the levels of government spending and taxation.
c-) amounts of capital and labor and the available technology
d-) preferences of the public
3-) From 1990 to 1995, the U.S. economy was in a recessionary gap. According to the
classical economists, which of the following should have occurred following this period?
a-) wages should have fallen which would cause more workers to be hired
b-) prices should have fallen which would increase consumer spending
c-) interest rates should have fallen which would increase consumer and investment spending
d-) all of the above should have occurred
4-) New Keynesians assume that
a-) expectations are rational.
b-) wages and prices are sticky.
c-) long-term contracts are a source of sticky wages and prices.
d-) all of the above are true
5-) The aggregate demand curve tells us possible:.
a-) combinations of M and Y for a given value of P.
b-) combinations of M and P for a given value of Y.
c-) combinations of P and Y for a given value of M.
d-) results if the CB reduces the money supply
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6-) If the short-run AS curve is horizontal and the long-run AS curve is vertical, then a
change in the government spending will change ... in the short run and change ... in the
long run.
a-) only prices; only output.
b-) only output; only prices.
c-) both prices and output; only prices.
d-) both prices and output; both prices and output.
7-) Crowding out occurs when an increase in government spending ... the interest rate and
investment ...
a-) increases; increases
b-) increases; decreases
c-) decreases; increases
d-) decreases; decreases
8-) In the short run, a favorable supply shock causes
a-) both prices and output to rise
b-) prices to rise and output to fall
c-) prices to fall and output to rise.
d-) both prices and output to fall.
9-) In the below Figure, the initial eect of an increase in the money supply is illustrated as
a movement from
a-) point 1 to point 2.
b-) point 2 to point 3.
c-) point 1 to point 3.
d-) point 2 to point 1.
2
10-) According to the traditional viewpoint, a tax cut without a cut in government spending:
a-) raises consumption in both the short run and the long run.
b-) lowers consumption in both the short run and the long run.
c-) raises consumption in the short run but lowers it in the long run.
d-) lowers consumption in the short run but raises it in the long run.
11-) A permanent leftward shift of the Aggregate Demand Curve, occurring at time t0, as
shown in the gure. Show the path followed by Y and P on the separately in two graphs.
10 & 11. CHAPTERS Aggregate Demand II: The IS-LM Model to
Explain Fluctuations
1-) When planned expenditure is drawn on a graph as a function of income, the slope of the
line is:
a-) zero.
b-) between zero and one
c-) one
d-) greater than one.
2-) An increase in $1 in government purchases will:
a-) Shift the planned expenditure curve upward by $1.
b-) Shift the IS curve to the right by $1/(1-MPC).
c-) Not shift the LM curve.
d-) All of the above
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3-) If the consumption function is C = 200 + 0.8(Y-T) and both taxes and government
purchases increase by $1, the equilibrium level of income will (in the model of Keynesian
cross):
a-) remain constant
b-) increase by $5.
c-) increase by $1.
d-) increase by $4.
4-) In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment protability causes the aggregate demand function
to shift ..., the equilibrium level of aggregate output to rise, and the IS curve to shift to
the....
a-) up; left
b-) up; right
c-) down; left
d-) down; right
5-) Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000 billion. The
marginal propensity to consume is 4/5. By how much and in what direction should govern-
ment purchases be changed?
a-) increase by $1,000 billion
c-) increase by $100 billion
b-) decrease by $1,000 billion
d-) increase by $200 billion
6-) Mary takes out a xed interest rate loan and then ination rises more than expected.
The real interest rate she pays is
a-) higher than shed expected, and the real cost to her of the loan rises.
b-) higher than shed expected, and the real cost to her of the loan falls.
c-) lower than shed expected, and the real cost to her of the loan rises.
d-) lower then shed expected, and the real cost to her of the loan falls
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7-) Which of the following statements is FALSE?
a-) The IS curve represents equilibrium in the goods market.
b-) The equilibrium condition in the goods market is:
1 = C(1

1) + 1(:) +

G
c-) The LM curve represents money market equilibrium.
d-) The equilibrium condition in the money market is:

`,

1 = 1(:. 1 )
e-) The intersection determines the multiple combinations of Y and r that satisfy equilibrium
in both goods and money markets
8-) An interpretation of why the IS curve slopes downward and to the right is that as income
rises, national saving rises, and this increase drives the interest rate:
a-) down, thereby decreasing investment.
b-) down, thereby increasing investment.
c-) up, thereby decreasing investment.
d-) up, thereby increasing investment.
9-) When the LM curve is drawn, the quantity that is held xed is:
a-) the nominal money supply.
b-) the real money supply.
c-) government spending.
d-) the tax rate.
10-) If there is an exogenous decrease in the investment, then
a-) the LM curve would shift to the left.
b-) the IS curve would shift to the left.
c-) the IS curve would shift to the right.
d-) the AD curve would shift to the right.
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11-) If the short -run IS-LM equilibrium occurs at a level of income below the natural rate
of output, then in the long run the price level will ..., shifting the ... curve to the right and
returning output to the natural rate.
a-) increase; IS
b-) decrease; IS
c-) increase; LM
d-) decrease; LM
12-) In a closed economy with output xed, an increase in government spending matched
by an equal increase in taxes will
a-) increase consumption.
b-) increase the interest rate.
c-) increase investment.
d-) leave all other variables unchanged
13-) A decrease in taxes will shift the:
a-) IS curve to the left and decrease both the interest rate and the level of income.
b-) IS curve to the right and increase both the interest rate and the level of income.
c-) IS curve to the right and increase the level of income but decrease the interest rate.
d-) LM curve downward (to the right) and increase the level of income but decrease the
interest rate
14-) What is the most direct eect when CB targets a higher nominal interest rate?
a-) The money supply increases.
b-) The money supply decreases.
c-) The ination rate increases.
d-) The ination rate decreases.
15-) According to the IS-LM model, if government raises taxes but the CB wants to hold
the interest rate constant, then the CB must ... the money supply.
a-) increase
b-) decrease
c-) rst increase and then decrease
d-) rst decrease and then increase
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16-) If people suddenly wish to hold more money at each interest rate:
a-) The money demand curve will shift to the right.
b-) The LM curve will shift upward (to the left).
c-) Real income will fall.
d-) All of the above.
17-) All of the following events are consistent with the spending hypothesis as contributing
to the Great Depression except:
a-) the decline in investment spending on housing because of a decline in immigration in the
1930s.
b-) the decline in consumption spending caused by the stock market crash of 1929.
c-) scal policy to reduce the budget decit by raising taxes in 1932.
d-) the 25-percent reduction in the money supply between 1929 and 1933.
18-) According to the Classical Economic Theory, when the Great Depression started, the
government should have:
a-) done nothing
b-) had a large increase in government spending
c-) gone o the Gold Standard
d-) enacted high taris
19-) If there is an adverse supply shock such as a sharp increase in oil prices, then in the
short run.
a-) the AS curve would shift downward
b-) the price would increase, and income would not change.
c-) the price would increase, and income would decrease.
d-) the AD curve would shift downward
e-) the IS curve would shift to the left.
20-) Government spending may aect private consumption, investment, and interest rates.
Suppose government spending is now $500 billion. I f the government permanently raises
spending to $600 billion to nance national health insurance, which of the following is true
for: Real GDP, Private Consumption, Private Investment, Interest Rates
a-) fall rise rise fall
b-) rise fall fall rise
c-) fall no change fall rise
d-) no change fall no change no change
e-) rise rise rise no change
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21-) A large number of new immigrants causes wages to temporarily fall for one period in
France. In the short-run model, what would happen to the French economy over time?
a-) Ination falls for one period, then immediately returns to the original level in the next
period
b-) Ination drops, and the eect persists well after the rst period
c-) Ination increases, and the eect persists well after the rst period
d-) Ination increases for one period, then immediately returns to the original level in the
next period
22-) Assume that the long-run aggregate supply curve is vertical at Y=3,000 while the
short-run aggregate supply curve is horizontal at P=1.0. The aggregate demand curve is
Y=3(M/P) and M=1,000.
a-) If the economy is initially in long-run equilibrium, what are the values of P and Y?
b-) Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5.
What are the new short -run P and Y?
c-) If the aggregate demand curve and long-run aggregate supply curve are unchanged, what
are the long-run equilibrium P and Y after the supply shock?
23-) Baslangta orta vade dengesinde olan bir ekonomide merkez bankas parasal byme
orann (money growth rate) azaltyor. Bu etkinin ksa ve orta vade sonunde baslang
durumuna gre yaratt g de gisiklikleri asa gdaki tabloda arts (+), azals (-), belirsiz (?),
de gismez (X) olarak belirtiniz. ( 20 puan)
i: Nominal faiz oranlar (reel interest rate)
r: reel faiz oranlar (nominal interest rate)
Y: retim (production)
u:

Issizlik oran (unemployment rate)
:: enasyon oran (ination rate)
i r Y u :
Ksa vade (short run)
orta vade (long run)
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24-) Assume that the demand for real money balance (M/P) is M/P = 0.6Y -100i, where
Y is national income and i is the nominal interest rate. The real interest rate r is xed at 3
percent by the investment and saving functions. The expected ination rate equals the rate
of nominal money growth. If Y is 1,000, M is 100, and the growth rate of nominal money is
1 percent, what must i and P be?
25-) Consider the impact of an increase in thriftinessmeaning that for any given level of in-
come people save more and consume less in the Keynesian cross. Suppose the consumption
function is
C =

C + c(1 1)
where

C is a parameter called autonomous consumption and c is the marginal propensity to
consume.
a-) What happens to equilibrium income when the society becomes more thrifty, as repre-
sented by a decline in

C
b-) What happens to equilibrium saving?
c-) Why do you suppose this result is called the paradox of thrift?
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26-) Suppose that the money demand function is
(`,1)
d
= 1. 000 100:
where r is the interest rate in percent. The money supply M is 1,000 and the price level P
is 2.
a-) Graph the supply and demand for real money balances.
b-) What is the equilibrium interest rate?
27-) Consider an economy that is characterized by the following equations:
Cd = 300 + 0.75(Y - T) - 300r
T =100 + 0.2Y
Id = 200 - 200r
L = 0.5Y - 500i
Y = 2500, G = 600, M =133.200 :
e
= 0.05, P =120
where r is the real interest rate, I is the nominal interest rate, M is the money supply,
:
e
is expected ination, and P is the price level. Find the equation for the IS curve using
the equilibrium condition that Y = C
d
+ I
d
+G.
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13. CHAPTER: Aggregate Supply
1-) Some rms do not instantly adjust the prices they charge in response to changes in
demand for all of the following reasons except:
a-) it is costly to alter prices.
b-) they do not want to annoy their frequent customers.
c-) some labor unions demand steady prices.
d-) some prices are set by long-term contracts between rms and customers
2-) What can you expect when theres an oil shock?
a-) Downward movement along a xed Phillips curve
b-) Upward movement along a xed Phillips curve
c-) Shift up of the Phillips curve
d-) Shift down of the Phillips curve
3-) Okuns law expresses a relationship between a change in
a-) the price level and a change in real GDP.
b-) the price level and a change in nominal GDP.
c-) real GDP and change in the unemployment rate.
d-) nominal GDP and a change in the unemployment rate
4-) The tradeo between ination and unemployment does not exist in the long run because
people will adjust their expectations so that expected ination:
a-) exceeds the ination rate.
b-) equals the ination rate.
c-) is below the ination rate.
d-) equals the ination rate of the previous year
5-) According to aggregate demand and supply analysis, the favorable supply shocks of
19951999 had the eect of
a-) increasing aggregate output, lowering unemployment, and raising ination.
b-) decreasing aggregate output, raising unemployment, and raising ination.
c-) increasing aggregate output, lowering unemployment, and lowering ination.
d-) decreasing aggregate output, raising unemployment, and lowering ination.
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6-) In the new classical model in the Figure below, an anticipated expansionary monetary
policy
a-) shifts the economy from point 1 to point 2 to point 3.
b-) shifts the economy from point 1 to point 4 to point 3.
c-) shifts the economy from point 1 to point 3.
d-) shifts the economy from point 3 to point 1.
7-) Which of the following will shift the aggregate supply curve up to the left?
a-) an increase in the price level
b-) a decrease in the level of output
c-) an increase in the expected price level
d-) a decrease in the price level
8-) This is an aggregate supply-aggregate demand graph for the U.S. economy.
Which of the following statements best describes the situation shown in the graph?
a-) The economy is suering from a recession.
b-) The unemployment rate is greater than the natural rate of unemployment.
c-) There is not sucient aggregate demand for the economy to reach long-run equilibrium.
d-) The economy is producing more than the natural rate of output.
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9-) All of the following characteristics that lead to an upward sloping (not vertical) short-run
aggregate supply curve (SRAS) except
a-) goods market clearing
b-) imperfect (sticky) information
c-) sticky prices or sticky wages
d-) rational expectations or adaptive expectations
10-) Assume that an economy is in equilibrium where output is at its natural level and the
CB decides to increase the money supply.
a-) What happens in the IS-LM model?
b-) What happens in the AS-AD model?
c-) How does the Phillips Curve for the economy respond?
11-) Phillips Curve: In the Phillips Curve framework in which : = E(:) + ,(u* - u)the
ination rate : equals the previously-expected ination rate E(:) plus the Phillips Curve
slope parameter , times the dierence between the economys natural rate of unemployment
u* and the current rate of unemployment u...
a-) If E(:) = 9% per year, u* = 6%, and u = 8%, what is the ination rate : going to be
if the Phillips Curve slope parameter , = 1/2?
b-) If E(:) = 3% per year, u* = 4%, and u = 4%, what is the ination rate : going to be
if the Phillips Curve slope parameter , = 1/2?
12-) Suppose we have an economy with a natural rate of unemployment of 6%, current
expected ination of 2%, and a Phillips Curve slope parameter of 1/2. Suppose that the CB
has a target ut for the unemployment rate and a target :t for the ination rate, and suppose
that for each percentage point ination is above its target level the CB raises unemployment
by an extra percentage point above its target level.
a-) If the target for the ination rate is 2% and the target for the unemployment rate is
6%,what will ination and unemployment be?
b-) If the target for the ination rate is 3% and the target for the unemployment rate is 4%,
what will ination and unemployment be?
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14. CHAPTER: Stabilization Policy?
1-) The outside lag is the time between a:
a-) Shock to the economy and the policy action responding to that shock.
b-) Policy action and its inuence on the economy.
c-) Shock to the economy and the realization that some policy action needs to be taken.
d-) Decision to implement a policy and the enactment of that policy.
2-) Which of the following is a FALSE statement about automatic stabilizers
a-) They are policies that stimulate or depress the economy when necessary without any
deliberate policy change
b-) They are designed to reduce the lags associated with stabilization policy
c-) Their examples are sales tax and unemployment insurance.
d-) The existence of automatic stabilizers is one of the arguments against active stabilization
policy
3-) Which of the following is NOT an automatic stabilizer?
a-) unemployment benets
b-) welfare spending
c-) defense spending
d-) social security spending
4-) Which of the following does not describe stabilization policy adequately?.
a-) It is a demand-side policy
b-) It consists of scal policy and monetary policy
c-) It aims at long-run trend of the economy.
d-) It aims at stabilizing business cycles.
5-) The time-inconsistency problem in discretionary policymaking about unemployment and
ination can be eectively avoided when the:
a-) policymaker has and is known to have an extremely strong preference for very low
ination.
b-) policymaker does not care about the rate of ination and simply sets policy to avoid
unemployment.
c-) private agents in the economy are not "rational."
d-) policymaker has more information than do the private agents in the economy
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6-) The central bank often deviates from simple policy rules because
a-) the rules are always wrong.
b-) they have new and more detailed information.
c-) they have no discretion.
d-) the governments are more interested in unemployment.
7-) Monetarists believe all of the following except:
a-) uctuations in the money supply are responsible for most large uctuations in the econ-
omy.
b-) the CB should keep the money supply growing at a steady rate
c-) slow and steady growth of the money supply would yield stable output, employment,
and prices.
d-) the CB should adjust the money supply to adjust to various shocks to the economy
8-) If in response to an increase in government spending, the central bank decides to keep
interest rates constant, then in the short run, income will increase
a-) more than in the case where the central bank keeps the money supply constant.
b-) less than in the case where the central bank keeps the money supply constant.
c-) the same as in the case where the central bank keeps the money supply constant.
d-) more or less than in the case where the central bank keeps money supply constant.
e-) None of the above answers.
9-) If the CB wishes to decrease (tighten) the money supply, it should:
a-) buy Treasury securities in the open market
b-) raise the discount rate
c-) lower the reserve requirements
d-) raise marginal tax rates
10-) What is stagation?
a-) Ination and output both stay low for some years.
b-) Ination stays high and output stays low for some years.
c-) Ination stays low and output stays high for some years.
d-) Ination and output stay high for some years.
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11-) Assume that in a certain economy the LM curve is given by Y = 2,000r 2,000 +
2(M/P) + u, where u is a shock that is equal to +200 half the time and -200 half the time,
and the IS curve is given by Y = 8,000 2,000r. The price level (P) is xed at 1.0. The
natural rate of output is 4,000. The government wants to keep output as close as possible
to 4,000 and does not care about anything else. Consider the following two policy rules:
Assume that the CN use the rule and set the money supply M equal to 1,000 and keep it
there. What will Y be when u = +200? Under rule i, what will Y be when u = 200?
15. CHAPTER: Government Debt
1-) The government is running a budget surplus if
a-) government spending is greater than tax revenue.
b-) tax revenue is greater than government spending.
c-) tax revenue is greater than consumption spending.
d-) tax revenue is greater than investment spending
2-) The nancing of government spending by issuing debt
a-) causes both reserves and the monetary base to rise.
b-) causes both reserves and the monetary base to decline.
c-) causes reserves to rise, but the monetary base to decline.
d-) has no net eect on the monetary base.
3-) Which of the following shortcomings with standard national debt and decit data cause
the size of the debt or decit to be overstated?
a-) reporting values in nominal terms and not in real terms
b-) not counting capital assets
c-) not counting future liabilities such as government pensions or social security
d-) not adjusting debt levels during an economic boom because tax revenues are higher than
average
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4-) According to the theory of Ricardian equivalence, if consumers are forward-looking,
they will view a tax cut that has no plans to reduce government spending as ..., so their
consumption will ...
a-) additional disposable income; increase.
b-) additional disposable income; remain unchanged
c-) a rescheduling of taxes into the future; increase.
d-) a rescheduling of taxes into the future; remain unchanged
5-) When my income was $100,000, I paid $10,000 in taxes. When my income became
$200,000, I paid $30,000 in taxes. My marginal tax rate is:
a-) 10%
b-) 15%
c-) 20%
d-) 30%
6-) Which of the following taxes is progressive?
a-) the income tax
c-) the cigarette tax
b-) the sales tax
d-) the Social Security tax
16. CHAPTER: Consumption
1-) Which of the following is not one of the Keynes conjectures for the consumption function
of individuals
a-) The marginal propensity to consume is between zero and one
b-) Interest rate is an important determinant of consumption
c-) The average propensity to consume, falls as income rises
d-) income is an inportant determinant of consumption
2-) Which of the following is not true?
a-) Irving Fisher developed the model where consumers decisions depend on current income,
as well as the expected future income, discount rate and interest rate
b-) Both Franco Modiglianis Life-Cycle Hypothesis and Milton Friedmans Permanent-
Income Hypothesis solve the consumption puzzle
c-) Franco Modiglianis Life-Cycle Hypothesis asserts that saving allows consumers to move
income from those times in life when income is high to those times when it is low (like the
times of retirement)
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d-) Robert Hall combines the permanent-income hypothesis with the assumption that con-
sumers have rational expectations about future income, and this implies that expected policy
changes can inuence the consumption
3-) Which of the following is true about Milton Friedman and the Permanent-Income Hy-
pothesis?
a-) Permanent income is the part of income that people do not expect to persist into the
future
b-) Permanent income is the one that consumers choose to consume if they have no disposable
income
c-) Permanent income is the annuity value of future incomes of consumers
d-) In the permanent income hypothesis people may save in case they would have small
income gain in the future
4-) Suppose the government levies a one-time tax this year that costs you $9,000. Suppose
you live forever and face the interest rate of 10%. Based on the permanent-income theory of
consumption, how would your consumption change?
a-) Consumption does not change.
b-) Consumption decreases by $9,000 immediately.
c-) Consumption decreases by $900 each year starting today.
d-) Consumption increases by $900 each year starting today.
5-) Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100
in the rst period and $100 in the second period. Jill earns nothing in the rst period and
$210 in the second period. Both of them can borrow or lend at the interest rate r.
a-) You observe both Jack and Jill consuming $100 in the rst period and $100 in the second
period.What is the interest rate r?
b-) What will happen to Jills consumption in the rst period when the interest rate in-
creases? Is Jill better o or worse o than before the interest-rate increase?
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6-) Consider an individual that lives for two periods. In period 1 the income of the individual
is
1
= 10.000 while in period 2 is
2
= 110.000 . Our individual has no initial assets. You
can think at the individual as a student in period 1 and then a worker in period 2. The
individual can lend and borrow at the real interest rate r=10%. The utility function of the
individual is:
l(c
1
. c
2
) = ln(c
1
) + ln(c
2
)
Where c
1
denotes consumption in period 1 and c
2
denotes consumption in period 2.
a-) Write down the budget constraints faced by our individual in each period. Write down
the intertemporal budget constraint;
b-) Use the intertemporal budget constraint in (a) to substitute for c
1
in the utility function.
This will give you a utility function as a function of c
2
. Maximise that utility and nd the
optimal value of c
2
. Use that to nd the optimal value of c
1
and the saving (a negative
saving means borrowing).
c-) Due to an economic downturn, the real interest rate falls to 0.05 or 5%. Find his new
optimal levels of current consumption c
1
, future consumption c
2
and saving. Using the
concepts of income and substitution eects explain how the decrease in the real interest rate
aects the individuals choices.
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