1) If nominal GNP increases at the rate of 10 per cent per year where as the GNP deflator increases at 8 per cent per year, then

A. real GNP remains constant
B. real GNP rises by 10 %
C. real GNP falls by 8 %
D. real GNP rises by 2%

2) Assume that national income is at first at its equilibrium level when desired investment falls. We will expect

A. a fall in national income, but not by as much as the fall in desired investment
B. no change in national income even though desired investment spending falls
C. an increase in national income by an amount equal to the reduction in investment spending
D. a fall in national income by some multiple of the fall in desired investment spending

3) If MPC for the economy is 0.8, then

A. MPS is 1/0.8
B. the multiplier is 4
C. the multiplier is undefined
D. the MPS is 0.2

Why?

4) Prevention of main swings in economic activity could be handled most easily by

A. household sector
B. business sector
C. financial sector
D. government sector

Describe how.

5) If Bank of England wanted to discourage investment spending and reduce aggregate demand, it can

A. reduce required reserve ratio
B. sell securities on open market
C. lower discount rate
D. buy securities on open market

Describe.

6) Commercial banks create money by

A. loaning out pounds they get as deposits
B. printing currency
C. collecting bad debts
D. earning profits

Describe.

7) Assume Mr. Robinson deposits pounds 600 in currency at the bank. Later that day Ms. Volker borrows pounds 1200 from the same bank. The money supply would have

A. increased by pounds 1200
B. increased by pounds 600
C. decreased by pounds 600
D. stayed the same

Describe how.

8) Assume that per capita income in Alfaland (with initial high per capita income) is  growing faster than it is in Betaland (with initial low per capita income). Then:

A. real value of the output produced by Alfaland exceeds that of Betaland
B. difference in the living standards between Alfaland and Betaland remain constant over time
C. gap in the standard of living between two countries decrease over time
D. gap in the standard of living between two countries widens over time

Describe.

9) Expansionary fiscal policy

A. decreases aggregate demand
B. occurs when government takes actions to stimulate the economy
C. occurs when government cuts spending
D. occurs when government reforms public sector through privatisation

How?

10) Assume marginal propensity to consume (MPC) is 0.9. Beginning from equilibrium, investment demand increases by 50. How much equilibrium income increases?

A. 50
B. 100
C. 250
D. 500

Show the calculation and describe the mechanism.