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Final Exam Sample Questions
Macroeconomics (Swinburne University of Technology)
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ECO20004_ Final Exam Sample Questions
1. According to classical theory, national income depends on ______, while Keynes proposed that
______ determined the level of national income.
A) aggregate demand; aggregate supply
B)
aggregate supply; aggregate demand
C)
monetary policy; fiscal policy
D)
fiscal policy; monetary policy
2. In the IS–LM model, which two variables are influenced by the interest rate?
A) supply of nominal money balances and demand for real balances
B)
demand for real money balances and government purchases
C)
supply of nominal money balances and investment spending
D)
demand for real money balances and investment spending
3. The equilibrium condition in the Keynesian-cross analysis in a closed economy is:
A) income equals consumption plus investment plus government spending.
B)
C)
planned expenditure equals consumption plus planned investment plus government
spending.
actual expenditure equals planned expenditure.
D)
actual saving equals actual investment.
4. In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government
spending increases planned expenditures by ______ and increases the equilibrium level of
income by ______.
A) $1 billion; more than $1 billion
B)
$0.75 billion; more than $0.75 billion
C)
$0.75 billion; $0.75 billion
D)
$1 billion; $1 billion
5. A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
A) upward and to the right.
B)
downward and to the right.
C)
downward and to the left.
D)
upward and to the left.
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6. During a recession, consumers may want to save more to provide themselves with a reserve to
cushion possible job losses. Use the Keynesian model to describe the impact of an exogenous
decrease in consumption (a decrease in C) on the equilibrium level of income in the economy.
Will aggregate national saving increase?
A decrease in exogenous consumption reduces planned spending, which reduces the equilibrium level
of income by a greater amount via the consumption spending multiplier, i.e., a decrease in
consumption spending leads to a decrease in income, which leads to another decrease in consumption
spending, and so on. At the new lower equilibrium level of income, both income and consumption
spending will have decreased by the same amount, so that national saving (Y – C – G) will be
unchanged.
7. Assume that a government raises its own expenditures and funds those expenditures by printing
more money, thereby raising the money supply in the economy. How will this affect the IS-LM
curve and the equilibrium level of income and the interest rate
The rise in government expenditures will shift the IS curve to the right.
[insert figure here]
In the money market, the demand for real balances will rise, raising interest rates, but a rise in money
supply will shift the supply of real balances to the right thereby reducing interest rates. Consequently,
the LM curve will become flatter and more horizontal.
Under equilibrium, the higher level of output Y will be attained at a lower level of interest rate r, as
compared to the level of r it would reach under the old LM curve if the money supply were not raised.
8. If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for
any given interest rate shifts to the right by:
A) 100.
B)
200.
C)
300.
D)
400.
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Use the following to answer questions 9-10:
Exhibit: IS–LM Monetary Policy
9. (Exhibit: IS–LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate
r1 and income Y1, a decrease in the money supply would generate the new equilibrium
combination of interest rate and income:
A) r2, Y2
B)
r3, Y2
C)
r2, Y3
D)
r3, Y3
10. (Exhibit: IS–LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate
r1 and income Y1, an increase in the money supply would generate the new equilibrium
combination of interest rate and income:
A) r2, Y2
B)
r3, Y2
C)
r2, Y3
D)
r3, Y3
11. The monetary transmission mechanism in the IS–LM model is a process whereby an increase in
the money supply increases the demand for goods and services:
A) directly.
B)
by lowering the interest rate so that investment spending increases.
C)
by raising the interest rate so that investment spending increases.
D)
by increasing government spending on goods and services.
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12. If neither investment nor consumption depends on the interest rate, then the IS curve is ______
and ______ policy has no effect on output.
A) vertical; monetary
B)
horizontal; monetary
C)
vertical; fiscal
D)
horizontal; fiscal
13. Suppose Congress passes legislation that reduces taxes. Use the IS–LM model to illustrate
graphically the impact of the tax reduction on output and interest rates. Be sure to label: i. the
axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the
terminal equilibrium values.
14. When an economy expands its monetary and fiscal policies, how is the aggregate demand curve
affected?
If monetary policy is expanded, for a given price level the increase in money supply further
increases real money balances. This shifts the LM curve downward and raises income. Thus, the
aggregate demand curve is shifted to the right by an increase in money supply. On the other
hand, the fiscal expansion (like increase in government purchases and a decrease in taxes) for
any given price, shifts the IS curve to the right and raises income. Therefore, the aggregate
demand curve is shifted to the right.
15. In the Mundell–Fleming model:
A) the exchange rate system must have a floating exchange rate.
B)
the exchange rate system must have a fixed exchange rate.
C)
it makes no difference whether the exchange rate system has a floating or a fixed exchange
rate.
the behavior of the economy depends on whether the exchange rate system has a floating
or fixed exchange rate.
D)
16. Under a floating system, the exchange rate:
A) fluctuates in response to changing economic conditions.
B)
is maintained at a predetermined level by the central bank.
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C)
is changed at regular intervals by the central bank.
D)
fluctuates in response to changes in the price of gold.
17. In a small open economy with a floating exchange rate, if the government adopts an
expansionary fiscal policy, in the new short-run equilibrium:
A) income and the exchange rate will both rise.
B)
the exchange rate will rise, but income will remain unchanged.
C)
income will rise, but the exchange rate will remain unchanged.
D)
both income and the interest rate will rise.
18. To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixedexchange-rate level, then the central bank must:
A) buy foreign currency.
19.
A)
B)
C)
D)
B)
sell foreign currency from reserves.
C)
raise taxes.
D)
decrease government spending.
The goods produced in U.S. industries may be made more competitive in world markets by:
appreciating the U.S. currency.
depreciating the U.S. currency.
keeping the exchange rate fixed.
expanding the money supply.
20. Suppose the government of a small open economy with a floating exchange rate imposes 50
percent tariffs on all imports. Use the Mundell–Fleming model to illustrate graphically the shortrun impact of the tariffs of the exchange rate and output in the country. Be sure to label: i. the
axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the
new short-run equilibrium.
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21. According to the sticky-price model:
A) all firms announce their prices in advance.
B)
all firms set their prices in accord with observed prices and output.
C)
some firms set their prices according to the aggregate supply equation.
D)
some firms announce their prices in advance, and some firms set their prices in accord
with observed prices and output.
22. Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the
greater the:
A) target nominal-wage rate.
B)
target real-wage rate.
C)
proportion of firms with flexible prices.
D)
proportion of firms with sticky prices.
23. Starting from the natural level of output, an unexpected monetary contraction will cause output
and the price level to ______ in the short run; and in the long run the expected price level will
______, causing the level of output to return to the natural level.
A) increase; increase
B)
increase; decrease
C)
decrease; decrease
D)
decrease; increase
24. The Phillips curve shows a ______ relationship between inflation and unemployment, and the
short-run aggregate supply curve shows a ______ relationship between the price level and
output.
A) positive; positive
B)
positive; negative
C)
negative; negative
D)
negative; positive
25. Demand-pull inflation is the result of:
A) high aggregate demand.
B)
low aggregate demand.
C)
favorable supply shocks.
D)
adverse supply shocks.
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26. Assume that an economy has the Phillips curve  = –1 – 0.5(u – 0.06). Then the natural rate of
unemployment is:
A) 0.5.
B)
0.12.
C)
0.06.
D)
0.03.
27. How does the Phillip curve explain the tradeoff between the unemployment and inflation?
Illustrate with a graph.
The Phillips curve is used to analyze unemployment and inflation in an economy. It shows a negative
relationship between them. One could choose a higher inflation with lower unemployment or vice
versa.
28. Active economic policy seeks to do all of the following except:
A) offset fluctuations in real GDP.
B)
use monetary and fiscal policy to shift aggregate demand.
C)
respond to changing economic conditions.
D)
take a hands-off approach to macroeconomic policy.
29. Increasing government spending when the economy is in a recession is an example of:
A) active monetary policy.
B)
active fiscal policy.
C)
passive monetary policy.
D)
passive fiscal policy.
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30. The time between a policy action and its influence on the economy is called the:
A) automatic stabilizer.
B)
time inconsistency of policy.
C)
inside lag.
D)
outside lag.
31. Policy is conducted by discretion if policymakers:
A) announce in advance how policy will respond to various situations and commit themselves
to following through on this announcement.
B) are free to size up the situation case by case and choose whatever policy seems appropriate
at the time.
C) announce and maintain a constant growth rate of the money supply.
D)
announce and achieve a balanced government budget.
32.
If citizens vote on the basis of both low inflation and low unemployment at the time of the election,
then presidents might, in order to ensure their reelection:
A)
spur inflation soon after their elections, and then cause a recession.
B)
stimulate the economy throughout their terms.
C)
cause a recession soon after their election, and then stimulate the economy.
D)
run a tight monetary and fiscal policy throughout their terms.
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33.
Explain why each of the following statements is a rationale for conducting active or passive policy:
a. Economic circumstances can change dramatically between the time that an economic downturn
begins and the time when policy actions have an effect on the economy.
b. Economists are not very accurate forecasters.
c. Increases in government spending generate increases in economic output.
d. Fluctuations in economic output have been less severe since World War II.
a.
b.
c.
d.
This statement supports passive policy. The statement refers to the long and variable lags that
accompany economic policy and might alter the intended impact of policy, making active policy
destabilizing rather than stabilizing.
This statement supports passive policy. The statement asserts that economists do not have sufficient
information to diagnose a problem or to gauge what active policy would be appropriate.
This statement supports active policy. The statement asserts that economists have powerful tools for
active policy available to offset economic downturns and to stabilize the economy.
This statement supports active policy. The implication of this statement is that knowledge of how the
economy works has improved since World War II, allowing the government to engage in active
policy that reduces fluctuations in output.
34. The government budget deficit is the ______, and government debt is the ______.
A) amount by which imports exceed exports; amount by which government spending exceeds
government revenue
B) amount by which government spending exceeds government revenue; amount by which
imports exceed exports
C) amount by which government spending exceeds government revenue; accumulation of
past government borrowing
D) accumulation of past government borrowing; amount by which government spending
exceeds government revenue
35. An increase in the elderly population of a country affects fiscal policy most directly because:
A) the elderly generally are not required to pay taxes.
B)
governments provide pensions and health care for the elderly.
C)
the elderly favor high interest rates on their savings.
D)
governments spend more on education as the proportion of the elderly increases.
36. A deficit adjusted for inflation should include only government spending used to make _____
interest payments.
A) real
B)
nominal
C)
foreign
D)
domestic
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37. The amount the government would owe if a borrower were to default on a governmentguaranteed loan is an example of:
A) capital budgeting.
B)
a contingent liability.
C)
a cyclically adjusted liability.
D)
Ricardian equivalence.
38. An estimate of what government spending and tax revenue would be if the economy were
operating at its natural rate of output and employment is called the ______ budget.
A) cyclically adjusted
B)
inflation-adjusted
C)
capital-asset
D)
generational accounting
39. According to the traditional viewpoint of government debt, a tax cut without a cut in
government spending:
A) raises consumption in both the short run and the long run.
B)
lowers consumption in both the short run and the long run.
C)
raises consumption in the short run but lowers it in the long run.
D)
lowers consumption in the short run but raises it in the long run.
40. The logic of Ricardian equivalence implies that:
A) tax cuts do not influence consumer spending but changes in government spending do.
B)
neither tax cuts nor changes in government spending affect consumer spending.
C)
tax cuts combined with future decreases in government spending will decrease consumer
spending.
if the government cuts taxes and increases current government spending, consumer
spending will increase.
D)
41. Monetary policy is linked to fiscal policy when government spending is financed by:
A) taxes.
B)
borrowing from banks.
C)
borrowing from foreigners.
D)
printing money.
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42. What is Ricardian equivalence? Give at least three reasons why Ricardian equivalence might
not correctly describe an economy.
Ricardian equivalence is the proposition that government debt is the equivalent of future taxes, so
financing government spending by debt is the equivalent of financing it by taxes. Ricardian
equivalence assumes consumers are forward-looking, but if consumers are myopic, then Ricardian
equivalence will not hold.
Ricardian equivalence assumes that spending is based on current and future income, but if some
consumers are unable to borrow to achieve their desired level of consumption, then the tax cut will
allow consumers to spend more, and Ricardian equivalence will not hold. Finally, if consumers
believe the future taxes will be paid by the next generation and not themselves, then the equivalence
between current debt financing and future taxes may break down.
43. Printing money increases inflation. The higher the inflation, the lower the real value of debt. So
why is this method not used to pay debts?
It is true that if the government prints a lot of money, this will result in lowering the real value of debt
because of inflation. However, this inflation can rise to hyperinflation, which will heavily depreciate
the value of currency and lead to more hazardous economic problems.
44. Common elements of financial crises include:
A) insolvencies and government corruption
B)
decline in asset prices and insolvencies of financial institutions.
C)
declining liquidity and low interest rates.
D)
high inflation and high interest rates.
45. An asset-price bubble bursts if there is:
A) a panic cycle of asset sales and falling asset prices.
B)
a statement from the central bank stating that the bubble is over.
C)
an excess demand for an asset that raises asset prices.
D)
a sharp decrease in interest rates that pricks the asset-price bubble.
46. The mortgage defaults during the 2008–2009 financial crisis severely reduced the capital
positions of:
A) major investment banks.
B)
government-sponsored enterprises involved in the mortgage market.
C)
a large insurance company (AIG).
D)
all of the above.
47. A credit crunch reduces aggregate demand by:
A) increasing the exchange rate.
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B)
increasing interest rates.
C)
reducing consumption and investment spending.
D)
reducing the money supply.
48. During the 2008–2009 period, the conventional monetary policy response was to _____ the
target federal funds rate, while the conventional fiscal policy response was to _____ taxes and to
_____ government spending.
A) increase; increase; increase
B)
decrease; decrease; decrease
C)
increase; increase; decrease
D)
decrease; decrease; increase
49. Use the aggregate demand–aggregate supply model to graphically illustrate the impact of a
financial crisis on output and prices in an economy in the short run. Explain the factors that
cause changes from the initial equilibrium to the new short-run equilibrium.
The credit crunch brought about by the financial crisis decreases the ability of consumers to
borrow to finance consumption expenditures, as well as reduces the ability of business to
borrow to finance investment spending. Households subject to more rigorous lending standards
also find it more difficult to finance spending on new residential housing, a component of
investment spending. The decrease in the value of houses decreases household wealth, which
has a further dampening effect on consumption spending. These factors reduce both the
consumption and investment components of aggregate demand. This can be represented by a
leftward shift in the AD curve in the graph. In the short run, there is a decrease in output to Y2
and a decrease in the price level to P2.
50. What was the effect of the recession of 2008-2009 on output and prices? Give one example of
conventional monetary policies and fiscal policies used by the government to fix the problem.
In any recession, both output and prices decrease. A monetary policy used by the U.S. government in
2008-2009 was the reduction of the target federal funds rate. And an example of a fiscal policy
implemented by the government was that government spending was increased and taxes were
reduced.
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