1. Suppose there is a policy mix of expansionary monetary policy and expansionary fiscal policy. This combination of policies must cause:
a. an increase in the interest rate (i)
b. a reduction in i
c. an increase in output (Y)
d. a reduction in Y
2. Suppose the consumption equation is represented by the following: C = 100 + .75(Y-T). The multiplier in this economy is ________.
a. 0.25
b. 2
c. 4
d. 1.33
3. Suppose the public only hold currency (i.e. there are no banks). The demand for money is given by
Money demand = $Y(0.4 - i)
The nominal income is $100 and interest rate is held fixed by the central bank at 10% (or 0.1). Starting from the initial equilibrium suppose nominal income increases to $125. The increase in income will require the central bank to increase the supply of money from ________ to ________ .
a. 100; 125
b. 300; 375
c. 30; 37.5
d. 40; 50
4. Use the following information to answer the question below.
C = 1000 + .8(Y-T)
I = 800
G = 1800
T = 1000
The equilibrium level of GDP for the above economy equals:
a. 10000
b. 14000
c. 16000
d. 20000
5. Suppose a bond offers to pay $1000 in one year and currently sells for $900. Given this information, we know that the interest rate on the bond is:
a. 9%.
b. 10%.
c. 11.1%
d. 90%
e. 110%
6. Suppose the economy is currently operating on both the LM curve and the IS curve. Given this information, we know that:
a. the goods market is in equilibrium
b. the bond market is in equilibrium
c. the money market is in equilibrium
d. financial markets are in equilibrium
e. all of the above
7. The four components of national income are
A consumption spending, savings, government purchases, net exports.
B consumption spending, investment spending, government purchases, gross exports.
C consumption spending, investment spending, tax revenue, net exports.
D consumption spending, investment spending, government purchases, net exports.
8. When the central bank controls the interest rate, the aggregate demand (AD) curve is downward sloping because:
a. a reduction in the money supply (M) will cause an increase in the interest rate, a reduction in investment, and a reduction in output.
b. a reduction in the aggregate price level (P) will cause the central bank to reduce the interest rate and thus increase output.
c. a reduction in P will cause an increase in the real wage, a reduction in employment, and a reduction in output.
d. as P increases, goods and services become relatively more expensive and individuals respond by reducing the quantity demanded of goods and services.
9. Suppose there is a reduction in the price of oil. This change in the price of oil will cause which of the following in the short run?
a. an increase in output
b. a reduction in the price level
c. a reduction in the interest rate
d. all of the above
e. none of the above
10. A reduction in the minimum wage will tend to cause which of the following?
A an upward shift in the wage setting curve
B a downward shift in the wage setting curve
C an upward shift in the price setting curve
D a downward shift in the price setting curve
d none of the above