Midterm 2-

PART I: TRUE/FALSE QUESTIONS:

1.  One way for the government to achieve faster economic growth through increased saving is to pursue policies that will lead to higher interest rates.

2.  With foreign trade, it is possible for less developed countries to consume at a point outside their PPFs.

3.  A boom is a period of time during which output is rising.

4.  In a boom, according to the Keynesian model, the opportunity cost of working for the last worker hired is greater than the benefit the firm will receive from hiring the last worker.

5.  In the short-run Keynesian model, the economy is doing fine provided that the economy is producing at the equilibrium level of GDP.

6.  An automatic stabilizer can be represented graphically as the vertical intercept of the consumption function.

7.  A decrease in autonomous taxes, holding everything else constant, will cause the consumption function with respect to aggregate income (consumption-income line) to shift upwards.

8.  In the long-run Classical model, an increase in government spending will not cause any change in employment, but in the short-run Keynesian model, it will cause an increase in employment.

9.  Comparing two different economies A and B:  if A has a larger output per capita than B, then every citizen in A has a better standard of living than the citizens in B.

10.  As you increase the level of employment and move along the aggregate production function the economy experiences increases in labor productivity.

11.  The classical long run model was initially developed to explain the growth of economies and the cause of economic fluctuations.

12.  An increase in capital must necessarily lead to an increase in employment as well as an increase in labor productivity since workers benefit from increased accessibility to capital.

13.  When income increases this will automatically cause both consumption and the marginal propensity to consume to increase.

14.  When aggregate expenditure is equal to or greater than GDP in an economy, then this economy is in equilibrium.

15.  When aggregate expenditure exceeds production, then inventories will fall and prices will increase in the simple Keynesian model.

16.  A situation of excess production is not possible in the Classical model since supply creates its own demand, while in the Keynesian model it is possible that producers can produce more than is demanded.

PART II: MULTIPLE CHOICE QUESTIONS:

17. Which of the following government policies will lead to economic growth?

a. An increase in the capital gains tax.

b. A decrease in the income tax rate.

c. Investment incentives offered to businesses.

d. (a) and (c)

e. (b) and (c)

18. Recessions can be explained as the natural result of

a. Sudden and significant shifts in the labor demand or the labor supply.

b. An economic boom coming to an end.

c. An increase in the price of oil.

d. Too much spending.

e. A change in the potential GDP or full employment GDP trend line.

19. At each level of employment, the labor supply curve tells us

a. The opportunity cost of working for the last worker hired.

b. The benefit to some firm of hiring the last worker.

c. The difference between the last worker's opportunity cost of working and the benefit he/she provides o the firm.

d. The equilibrium level of employment in the labor market.

e. The amount of labor individuals are willing to provide at a given level of production.

20. Suppose the MPC for an economy equals 0.8.  Holding everything else constant, if there is a spending shock of $200 million (a positive spending shock) what will be the effect on aggregate output.  (Ignore any potential effect from automatic stabilizers.)

a. Aggregate output will increase by $1000 million.

b. Aggregate output will increase by $1600 million.

c. Aggregate output will increase by $200 million.

d. Aggregate output will increase by $250 million since $200 million divided by 0.8 equals $250 million.

e. The new aggregate output cannot be determined from the given information:  we would need to know the level of autonomous consumption, investment, government spending, and net exports in order to calculate a number for aggregate output.

21. In the short-run macro model presented in class, cyclical unemployment is caused by insufficient

a. Labor supply.

b. Labor demand.

c. Spending.

d. Saving.

e. Taxes.

22. Economic fluctuations (business cycles)

a. Measure changes in the number of businesses started.

b. Measure fluctuations in the Dow Jones Industrial Average.

c. Result in businesses hiring fewer resources.

d. Reflect fluctuations in the level of economic activity relative to a long term trend.

e. Measure the changes in government spending that occur over time.

23. The three main goals of government macroeconomic policy are:

a. Price stability, low unemployment, and high growth rates of output.

b. Zero inflation, zero unemployment, and high standards of living.

c. High wages, high profits, and high standards of living.

d. Higher levels of government spending, lower taxes, and lower levels of budget    deficit.

e. Price stability, low nominal interest rates, high wages, low unemployment, and high rates of rowth for the economy.

24. If the marginal propensity to save is 0.25 and the government decreases its purchases by $10 billion, then real GDP will

a. Increase by $10 billion.

b. Increase by $40 billion.

c. Increase by $13.3 billion.

d. Decrease by $40 billion.

e. Decrease by $13.3 billion.

25. If the marginal propensity to consume is 0.75 and the government increases both taxes (assume taxes are autonomous) and government spending by $10 billion, then real GDP will

a. Increase by $30 billion.

b. Increase by $40 billion.

c. Increase by $10 billion.

d. Decrease by $40 billion.

e. Decrease by $10 billion.

26. Assume that a country with a marginal propensity to consume of 0.5 is experiencing a severe recession.  By how much would government spending have to increase in order to increase aggregate output by $200 billion?

a. $200 billion.

b. $40 billion.

c. $50 billion.

d. $66.66 billion.

e. $100 billion.

27. Referring to the previous question, by how much would autonomous taxes have to be changed to achieve this same increase in aggregate output?

a. Taxes would need to be increased by $100 billion.

b. Taxes would need to be increased by $66.66 billion.

c. Taxes would need to be decreased by $200 billion.

d. Taxes would need to be decreased by $50 billion.

e. Taxes would need to be decreased by $100 billion.

Answer the next two questions using the Keynesian model given below.  Assume that all dollar amounts are in billions.

C = 20 + .8(Y -T)

T = 10

G = 20

I = 20

(X - M) = ?

28. You are told that the equilibrium level of output for this economy is $310 billion. What is the level of net exports equal to for this economy?

a. The level of net exports for this economy cannot be determined from the information given.

b. Since T + G + I = $50 billion, then net exports must also equal $50 billion.

c. Net exports could be calculated provided that we at least knew what the level of imports was for this economy.

d. Net exports are equal to $10 billion.

e. Since G - T equals $10 billion and since economies must have a balance of trade then net exports must also equal $10 billion.

29. When aggregate income is equal to 200, the level of autonomous saving with respect to aggregate income for this economy is equal to

a. $160 billion.

b. $138 billion.

c. $18 billion.

d. -$22 billion.

e. cannot be determined from the information given.

30. Which of the following statements is TRUE?

a. Autonomous consumption is determined by the level of marginal propensity to consume in the economy.

b. Autonomous consumption is the amount of consumption that households do that is independent of the level of disposable income in the economy.

c. The y-intercept for the consumption function is the same with respect to aggregate income or disposable income.

d. (a), (b), and (c) are true.

e. (a) and (b).

31. Which of the following statements is TRUE?

a. An increase in taxes will stimulate the economy in the Keynesian model.

b. The smaller the MPS, the larger the multiplier.

c. According to the Keynesian model, an increase in disposable income will increase both saving and consumption.

d. (a) and (c).

e. (b) and (c).

32. Which of the following statements is TRUE?

a. According to the Classical economists, unemployment was a temporary deviation from equilibrium, and discretionary government spending would return the economy to full employment.

b. According to the Classical model if planned saving increases at every interest rate, holding everything else constant, then the equilibrium interest rate will increase.

c. According to the Classical model if planned investment increases at every interest rate, holding everything else constant, then government spending will be crowded out.

d. The 45-degree line in the Keynesian cross diagram indicates the size of the marginal propensity to consume.

e. In the Keynesian model if aggregate output exceeds aggregate expenditure inventories will increase and producers will reduce the level of output they produce.