PRINCIPLES OF MACROECONOMICS TAKE HOME TEST 1 September 2011

Student ID No.________________________ Student Name_______________________________________________ SECTION I 40 Questions Answer All

1 Mark Each

1.

If the government of Antigua has a current account surplus then the government spent ________ than it collected from tax revenue. a. more or less b. more c. the same amount d. less Decisions about monetary policy for the other Eastern Caribbean Currency Union Countries (ECCU) are made by: a. b. c. d. the Minister of Finance. the Governor of the Eastern Caribbean Central Bank the Monetary Council of the ECCU which comprises all the ministers of finance. representatives of the commercial banks who meet on a quarterly basis.

2.

3.

If M is 7000, V is 1.2 and P is 5 calculate the value of Y. a. 1,400 4. b. 5,833 c. 35,000 d. 1,680

If nominal GDP is 2000 and the money supply is 550, what is the velocity? a. 0.28 b. 3.64 c. 4.57 d. 5.57

Examples of money are: a a traveler's check. b. a dollar bill.

c a check

d all of the following

6.

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a: a. unit of account. b. store of value. c. standard of value. d. medium of exchange.

7.

When money is accepted as payment for a good or service, it is being used as a: a. medium of exchange. b. a mechanism for transforming current purchases into future purchases. c. store of value. d. unit of account.

8.

Generally when the Central Bank (or the monetary authority) decreases interest rates, investment spending ________ and GDP ________. a. decreases; increases b. decreases; decreases c. increases; decreases d. increases; increases

9.

John puts money into a piggy bank so he can spend it later. The function of money this illustrates is a unit of account? a. True. b. False

10.

Which of the following will tend to increase the size of the multiplier? a. a higher marginal tax rate b. a higher marginal propensity to import c. a higher marginal propensity to consume d. a higher level of government spending

11

Autonomous consumption is that portion of consumption expenditure that is not influenced by a. income b. preferences c. prices d the legal authorities. If interest rate dereases, the consumption function a. shifts upward b. shifts downward. c. is unaffected.

12

d. has a steeper slope.

13

If the government purchase multiplier is 4 and the government wants to increase the level of GDP ( in real GDP) by $120 million, it should increase government spending by a. $4.0M b. $7.5M c. $30.0M d. $480.0M

14.

The practice of exchanging goods and services for other goods and services rather than money is called: a. lend lease b. border exchanges c. barter d. Stealing

15.

For a bank, a. b. c. d. loans are assets and deposits are liabilities loans are liabilities and deposits are assets both loans and deposits are assets both loans and deposits are liabilities

Use the following information to answer questions 16 and 17: The statutory reserve requirement is 6%, and Leroy deposits his $2,000 check received as a graduation gift from ABIIT in his demand deposit account. The bank does not want to hold excess reserves. 16. How much of the deposit is the bank required to keep in statutory reserves? a. $1,000 b. $200 c. $120 d. $800

17.

How much can the bank lend initially based on the $2000 deposit after it has met the statutory reserve requirement? a. $1000 b $1880 c. $200 d. 0

18

If the government purchases of goods and services increases by $20m, when the MPC is 0.75, how much will GDP increase? a. b. c. d. $40m $80m $35m $27m

19.

If the Eastern Caribbean Central Bank reduces the discount rate, then this is an example of fiscal policy. a. True b. False.

20.

An expansionary monetary policy aimed at increasing economic activity will a. b. c. d. increase the money supply and decrease the interest rate increase the money supply and decrease aggregate demand increase the money supply but have no effect on aggregate demand increase both the money supply and the interest rate

21.

A contractionary monetary policy aimed at reducing economic activity will a. b. c. decrease the money supply but have no effect on aggregate demand decrease the money supply and increase the interest rate decrease both the money supply and the interest rate 4

d. 22.

decrease the money supply and increase aggregate demand

Which of the following is counted as investment in national income accounting? a. building a new factory b. depositing money in a credit union c) purchasing corporate stocks and bonds d. depositing money in a commercial bank

Use the balance sheet below for question 23 Royal Bank of Canada Assets Liabilities $20 Required Reserves $100 Deposits $80 Loans 23. The reserve ratio for Royal Bank of Canada based on the balance sheet is a. 0 percent b. 20 percent. c. 80 percent d. 100 percent Which of the following will create a movement along the money demand curve. A fall in the price level A decline in interest rates A increase in aggregate output None of the above 25 When the MPC is 0.65 a decrease in net taxes of $75m will have what effect on GDP? a 26 27 -$139.28m b $48.75m c $123.75m d $139.28m

24. a. b. c. d.

An increase in wealth results in a shift in the consumption function. a. True b. False A forest worker who is out of work because of low demand for lumber since the economy is in recession is said to be: a. cyclically unemployed b. frictionally unemployed b. structurally unemployed d. underemployed

28

Contractionary policies are policies: a that aim to reduce the level of GDP. b taken to move the economy away from potential output. c that aim to increase the level of GDP.

d aimed at dampening booms. 29 When an economy produces at its ____ level of output, the aggregate supply curve becomes ______ a. maximum; horizontal b. maximum; vertical c. minimum; vertical d. minimum; relatively flat and negatively sloped

30

If the market rate of interest for a loan is more than the expected rate of return firms will not invest all things being equal: a True b. False Money is a better medium of exchange because a It has zero return b It is less risky c It is more liquid d It is a better store of value

31

32

If nominal interest rates increase from 9 percent to 10 percent while inflation increases from 6 percent to 12 percent: a. the real interest rate falls from 3 percent to -2 percent b. the real interest rate rises from 2 percent to 3 percent c. the real interest rate falls from 5 percent to -2 percent d. the real interest rate rises from 15 percent to 22 percent

33

A central Bank can pump money into the economy by a. buying bonds b. selling bonds c. creating cash d. lowering the reserve requirements

34.

In a period of high unemployment a central bank would probably: a raise the discount rate b raise the required reserve ratio c buy bonds through open market operations d increase government spending and cut taxes

35

Banks in Antigua and Barbuda earn interest on all of the following except: a. Holding Antigua & Barbuda government securities. b. making loans to other banks. c. mortgage loans to customers. d. reserves deposited at the ECCB

36.

Net Worth on a banks balance sheet is a. equal to assets plus liabilities. c. equal to assets minus reserves.

b. sometimes called the owners equity. d. the same thing as net profits.

37.

In the Figure above, the economy moves from point 1 on the old aggregate demand curve AD1 to point 2 on the new aggregate demand curve AD2 whenever: a. government spending increases. c. taxes increase. d. either (a) or (b) occurs. b. the consumption expenditure increases.

38. (a)

If the GDP deflator for 2009 was 120 and in 2010 it was 108 then prices would have ______ by ________ over 2010: fallen , 12% b. risen, 10% c. risen, 12% d. fallen, 10%

39.

Suppose the ECCB increases the percentage reserve requirement from 6 percent to 7 percent. Which of the following will occur? a. Bank reserves will increase c. Bank reserves will decrease b. Bank lending will decrease d. Interest rates will decrease

40.

Which list ranks assets from most to least liquid? a currency, painting, House b. currency, shares in bank, House c. House, currency, shares in bank d. House, shares in bank, currency