31. Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000 billion. The marginal propensity to consume is 4/5 (0.8). By how much and in what direction should government 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

32. Using the numbers in question 31, by how much should taxes be changed?
a. increased by $1,000 billion c. decreased by $200 billion
b. decreased by $1,000 billion d. decreased by $250 billion

33. Assume that Equilibrium Real GDP is $20,000 while Potential Real GDP is $15,000. The marginal propensity to consume is 9/10. Assume that government decides to lower taxes by $1,000. To pay for this, it lowers government purchases by $1,000. As a result of these two changes, what is the new Equilibrium Real GDP?
a. $19,000 b. $20,000 c. $21,000 d. $14,000 e. $1,000


34. Which of the following statements is true about the national debt?
a. In total, it is higher now than it has ever been
b. Most of it is owed by the federal government to foreigners
c. It means that a tremendous burden is being passed to our children
d. Because of it, the United States is on the verge of bankruptcy
e. All of the above

35. If the official federal budget shows a deficit of $200 billion while the structural budget is has a surplus of $200 billion, it can be concluded that:
a. the intent of fiscal policy is very expansionary
b. there is hyperinflation
c. the unemployment rate is well above the natural rate
d. state and local governments have large surpluses
e. off-budget spending is counted in the official deficit but not in the structural deficit

36. The Phillips curve describes the relationship between:
a. the federal budget deficit and the trade deficit
b. savings and investment
c. the unemployment rate and the inflation rate
d. marginal tax rates and tax revenues

37. Several adjustments have been suggested to the official budget deficit to be able to measure the effects of the budget deficit on the economy. For which of the following would the adjusted deficit be larger than the official budget deficit?
a. state and local budget surpluses need to be added to the official budget deficit
b. the effects of unemployment need to be taken out of the official budget deficit
c. the effects of inflation need to be taken out of the official budget deficit
d. off-budget spending needs to be added to the official budget deficit

38. Which of the following is included in M-1?
a. gold c. checkable deposits e. stock
b. credit cards d. money market mutual funds

39. Which of the following is true about the Federal Reserve System?
a. its seven Board members are appointed by the President of the United States
b. its main policy-making body is called the CBO
c. it insures checking accounts against bank failure
d. it accepts deposits from individuals and makes loans for mortgages
e. All of the above

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40. Assume that the Fed increases the monetary base by $1 billion when the reserve requirement is 1/7. As a result, the money supply will:
a. increase by $1 billion c. increase by $7 billion
b. decrease by $1 billion d. increase by $143 million

41. If the Fed 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

42. The demand for money will fall if:
a. Real GDP rises c. the GDP Deflator rises
b. real interest rates rise d. people expect deflation soon

43. An increase in the money supply causes:
a. interest rates to fall, investment spending to rise, and aggregate demand to rise
b. interest rates to rise, investment spending to rise, and aggregate demand to rise
c. interest rates to rise, investment spending to fall, and aggregate demand to fall
d. interest rates to fall, investment spending to fall, and aggregate demand to fall

44. If individuals forecast future prices by examining the rates of inflation of the present and recent past, they are using:
a. adaptive expectations c. inflationary expectations
b. rational expectations d. structural expectations

45. If the actual unemployment rate is below the natural rate of unemployment, it would be expected that:
a. the rate of inflation would increase c. the Phillips curve would shift to the left
b. wages would fall d. the natural rate of unemployment would fall

46. According to the monetarist acceleration theory, in the long-run,
a. the actual unemployment rate will be below the natural rate of unemployment
b. the actual unemployment rate will be equal to the natural rate of unemployment
c. the actual inflation rate will be equal to the natural inflation rate
d. the budget deficit will be equal to zero
e. the money supply will be growing at a constant rate per year

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47. According to the monetarists, in the long-run, the Phillips Curve is:
a. vertical c. downward-sloping
b. horizontal d. upward-sloping

48. Which of the following statements is true about supply-side economics?
a. The main change made by the tax laws of 1981 and 1986 was to
increase marginal tax rates in order to balance the budget
b. The Laffer Curve says that, if marginal tax rates fall, tax
revenues will rise, and the budget deficit will decrease
c. If the tax laws of 1981 and 1986 had had their intended effect, consumption would have
risen, causing an increase in both real GDP and in the price level
d. All of the above

49. Those who oppose a Constitutional amendment to require a balanced federal budget would make which of the following arguments:
a. Deficits are bad because they can cause crowding out
b. Such an amendment could force the government to undertake
policies that would increase a recessionary gap
c. Deficits can cause inflation by increasing aggregate demand
d. Budget deficits can cause an increase in the trade deficit by appreciating the dollar

50. If the money supply is: The interest rate is:
$100 billion 10%
120 billion 8%
140 billion 6%
160 billion 4%
120 billion 2%

If the interest rate is: Investment spending is:
10% $10 billion
8% 20 billion
6% 30 billion
4% 40 billion
2% 50 billion

Assume that equilibrium GDP is $400 billion, potential GDP is $500 billion, the marginal propensity to consume is 9/10, the interest rate is 8%, investment spending is $20 billion, the money supply is $120 billion, and the reserve requirement is 1/10. By how much and in what direction should the Fed change the monetary base?
a. increase it by $20 billion d. increase it by $2 billion
b. decrease it by $100 billion e. decrease it by $10 billion
c. increase it by $90 billion

END OF EXAMINATION