Multiple Choice

1. The baseline level of consumption Co

a). is the amount by which consumption spending changes in response to a $1 change in net income.

b). is the amount households could spend on consumption goods if they had no income at all.

c). is the amount by which consumption spending changes in response to a $1 change in disposable income.

d). is the amount by which consumption spending could change in response to a $1 change in household wealth.

2. If the marginal propensity to consume is similar to .75, then

a). the marginal propensity to save is equal to .15

b). the marginal propensity to save is equal to .25

c). the marginal propensity to save is equal to .65

d). the marginal propensity to save is equal to .35

3. If consumption spending changes by $5 trillion when disposable income alter by $8 trillion, the marginal propensity to save is same to

a). $3 trillion

b). .625

c). $13 trillion

d). .375

4. The value of demand for imports depends on

a). domestic real GDP

b). the real income of our trading partners

c). domestic real GDP and foreign real interest rates

d). the level of exports

5. Using the quantity theory of money, the bulk of modification in the rate of inflation is due to changes in the

a). growth rate of the velocity of money

b). growth rate of real GDP

c). growth rate of the money supply

d). growth rate of real wages

6. The change in consumption spending (?C) which happens as a result of a change in government purchases (?G) is equal to

a). Cy X ?G

b). - Cy X ?G

c). -Cy X (1 - t) X ?Y

d). 0

7. Better technology leads to a higher level of

a). the efficiency of labor

b). the efficacy of labor

c). the utilization of labor

d). the hiring of labor

8. The parameter α of the Cobb-Douglas production function is also a number

a). between 0 and 2

b). between -1 and 0

c). greater than 1

d). between 0 and 1

9. The parameter α of the Cobb-Douglas production function

a). governs how fast diminishing returns to investment sets in

b). governs how fast diminishing returns to savings sets in

c). governs how fast diminishing returns to technology sets in

d). governs how fast diminishing returns to labor sets in

e). b and c

10. The law of one price:

a). refers to output produced by a monopolist

b). outlaws price discrimination

c). states that in the absence of a price floor, a market achieves an equilibrium price

d). shows how the prices of many goods are aggregated into a single composite price index for measuring inflation

e). assumes that goods cost nothing to distribute

Essay Questions

Question 1

Does an increase in the money supply lower or increase the short-term rate of interest?  Does it increase or decrease the long-run rate of interest?  Describe your answers.

Question 2

Suppose that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?

Question 3

Consider that 30% of a country's population is institutionalized in hospitals, schools, or prisons; 10% are full-time homemakers; another 10 percent are retired; 45% of the population is employed either full-time or part-time; and 5% of the population is unemployed and seeking work. Evaluate the unemployment rate?  Is it: 5%; 10%; 15%; 25%; 55%, or none of these?

Question 4

Dsecribe a complete business cycle (trough, peak, expansion, recession), focusing on what happens to output, investment, employment in each phase.