ECONOMIC QUESTIONS ANSWERS

1. If Keynes' law applies during economic contractions and Say's law applies during economic expansion, how will the three goals of macroeconomics be affected?

a) trade-offs and connections may differ in the short run and the long run
b) institutional and market structures will connect factors of production
c) the economy will face genuine limits to how much can be produced
d) determinates of total supply for the economy will be traded-off

2. If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:

a) higher profits will induce expanded production.
b) the maximum potential GDP will be exceeded.
c) increase in quantity produced won't be large.
d) a majority of industries will start running into limits.

3. Referring to the above diagram, which of the following is a true statement?

a) Macroeconomic policy will be needed to address rising inflation.
b) There is insufficient aggregate demand to reach full employment.
c) The equilibrium in the economy is at a level of output above full employment.
d) There is sufficient aggregate demand to cause inflationary pressures.

4. The graph above refers to a significant increase in individual income taxes, taking them to their highest level in 50 years. Which of the following is likely to result?
a) macroeconomic supply will decrease in the short run
b) cyclical unemployment will decrease
c) the economy will experience lower economic growth
d) inflationary pressures will be mild

5. According to macroeconomic theory, evidence that high unemployment may be accompanied by low inflation, and low unemployment may be accompanied by high inflation is supported by the:
a) neoclassical expenditure-output model.
b) Keynesian Inflation trade-off model.
c) Keynesian cross diagram.
d) Keynesian Phillips curve tradeoff.

6. Referring to the diagram, which of the following is a true statement?
a) The increase in supply (Q1 to Q2) may result from decreased government spending.
b) The increase in supply (Q1 to Q2) may come about because of increased money supply.
c) The increase in output (Q1 to Q2) may result from increased levels of taxation.
d) The increase in output (Q1 to Q2) may come about because of lower levels of taxation.

7. According to the quantity theory, if constant growth in the money supply is combined with fluctuating velocity, which of the following is most likely to result?
a) unpredictable rises and falls in nominal GDP
b) quantity of credit rises above where it otherwise be
c) innovations relating to banking and finance
d) monetary policy will become inevitably imprecise

8. Which of the following events would cause interest rates to increase?
a) lower tax rates
b) lower reserve requirements
c) a higher discount rate
d) an open market operation to buy bonds

9. If the economy is at equilibrium as shown in the diagram above, then an expansionary monetary policy will:
a) reduce both unemployment and inflation.
b) reduce unemployment, but have little effect on inflation.
c) reduce unemployment, but increase inflation.
d) have no effect on both unemployment and inflation.

10. The diagram above refers to a private closed economy. In this instance, the equilibrium GDP is:
a) $60 billion.
b) $180 billion.
c) $60 billion at all levels of GDP.
d) between $60 and $180 billion.

Essay/ short answer

1. The government of Talonia has decided to stimulate its economy by increasing is spending during the upcoming fiscal year. The government's economic advisors have determined that for each 100 in stimulus spending received, 24% will be repaid to the government for taxes, 18% of after-tax income will be saved, 22% will be spent on imports, and the remaining balance will be spent on domestically produced goods and services. Determine what fraction of expenditures is recycled and calculate the value of Talonia's multiplier.

2. Stealth Bank is holding $4 million in reserves, $9 million in government bonds and $9.6 million in low risk mortgage loans. Out of the $20 million in customers' deposits, Stealth holds $13.1 million in the form of certificates of deposit. Describe the formula for determining Stealth Bank's net worth and, using the figures above, determine the Bank's net worth. Identify the criteria for classifying a bank as healthy or unhealthy and determine which applies to Stealth Bank in these circumstances.