Econ 232 Spring 2006
Midterm 2
1)
Which of the following will occur
if there is an increase in money supply?
(a) The IS curve shifts and the
economy moves along the LM curve.
(b) Both the IS and LM curves shift.
(c) Output will change due to shift in
IS curve.
(d) Neither the IS nor the LM curve
shifts.
(e) The LM curve shifts and the
economy moves along the IS curve.
2)
Suppose the economy is
operating on the LM curve but not on
the IS curve. Given this information, we
know that:
(a) the money market and bond
markets are in equilibrium and the
goods market is not in equilibrium.
(b) neither the money, bond, nor
goods markets are in equilibrium.
(c) the goods market is in
equilibrium and the money market is
not in equilibrium.
(d) the money, bond and goods
markets are all in equilibrium.
(e) the money market and goods
market are in equilibrium and the
bond market is not in equilibrium.
3)
We know that the amount of
money that individuals want to hold
will:
(a) increase as the interest rate
increases.
(b) increase as income decreases.
(c) decrease as the interest rate
increases.
(d) Will depend on price level
(e) none of the above
4)
Suppose Turkish economy is
represented by the following equations:
C = 500 + .5YD
T = 600 I =
300
G = 2000
Given the above variables, calculate
the equilibrium level of output.
(a)
(b)
(c)
(d)
(e)
2500
3400
5000
6800
None of the above
5)
A reduction in the marginal
propensity to consume from .7 to .6 will
cause:
(a) the ZZ line to become steeper and a
given change in autonomous consumption
(c0) to have a smaller effect on output
(b) the ZZ line to become steeper and a
given change in autonomous consumption
(c0) to have a larger effect on output
(c) the ZZ line to become flatter and a
given change in autonomous consumption
(c0) to have a larger effect on output
(d) the ZZ line to become flatter and
a given change in autonomous
consumption (c0) to have a smaller
effect on output
(e) none of the above
6)
Based on our understanding of
consumption and saving, we know that
the marginal propensity to consume and
the marginal propensity to save must:
(a) sum to exactly one.
(b) be equal to the multiplier.
(c) sum to less than one.
(d) sum to more than one.
(e) be equal to each other.
7)
Which of the following events
would cause a reduction in the size of
the multiplier?
(a) a reduction in government
spending
(b) a reduction in taxes
(c) an increase in the marginal
propensity to save
(d) an increase in the marginal
propensity to consume
(e) none of the above
Econ 232 Spring 2006
Midterm 2
Use the data below to answer the following
questions.Suppose a country has 150 million
people, of whom 125 million are working age.
Of these 125 million, 75 million have jobs. Of
the remainder: 25 million are actively
searching for jobs; 25 million would like jobs
but are not searching.
8)
(a)
(b)
(c)
(d)
(e)
The labor force is:
25 million.
75 million.
100 million.
150 million.
None of the above
9)
CANCELLED The labor force
participation rate is:
(a)
.15
(b)
.33
(c)
.5
(d)
.75
(e)
.8.
10)
is:
(a)
(b)
(c)
(d)
(e)
The official unemployment rate
.16
.25
.33
0.5
None of the above
11) The GDP deflator provides a
measure of which of the following?
(a) the ratio of GDP to the number of
workers employed
(b) the price of a typical consumer's
basket of goods
(c) real GDP divided by the
aggregate price level
(d) the ratio of GDP to the size of the
population
(e) the ratio of nominal GDP to
real GDP
12) Prices for which of the following
are included in the GDP deflator, but
not included in the Consumer Price
Index?
(a) firms' purchases of new
equipment
(b) consumption of services typical
urban consumers
(c) intermediate goods and services
(d) consumption of goods by typical
urban consumers
(e) none of the above
13) For this question, assume that
individuals do NOT hold currency (i.e.,
c = 0). If the ratio of reserves to deposits
is .20, the money multiplier is:
(a) .2.
(b) 1.25.
(c) 4.
(d) 5.
(e) 10.
14) Which of the following events
will most likely cause an increase in the
money supply?
(a) a decrease in the ratio of
reserves to deposits
(b) a central bank sale of bonds
(c) a shift in public preferences away
from checkable deposits toward
currency
(d) all of the above
(e) none of the above
15) Which of the following events
will cause a reduction in equilibrium
output?
(a) an decline in taxes
(b) an increase in the marginal
propensity to save
(c) an increase in government
spending
(d) all of the above
(e) none of the above
16) The IS curve will NOT shift
when which of the following occurs?
(a) a reduction in government
spending
(b) a reduction in consumer
confidence
(c) a reduction in the interest rate
(d) all of the above
(e) none of the above
Econ 232 Spring 2006
Midterm 2
17) Which of the following best
defines the IS curve?
(a) the combinations of i and Y
that maintain equilibrium in the
goods market
(b) the combinations of i and Y that
maintain equilibrium in financial
markets
(c) illustrates the effects of changes
in i on desired money holdings by
individuals
(d) illustrates the effects of changes
in i on investment
(e) both (b) and (c) are correct.
18) We know with certainty that a tax
increase must cause which of the
following?
(a) an increase in investment
(b) no change in investment
(c) a reduction in investment
(d) depends on marginal propensity
to consume
(e) none of the above
19) An increase in the money supply
must cause which of the following?
(a) a leftward shift in the IS curve
(b) no change in the interest rate if
investment is independent of the
interest rate
(c) no change in output if
investment is independent of the
interest rate
(d) a reduction in the interest rate and
ambiguous effects on investment
(e) an increase in investment and a
rightward shift in the IS curve
20) Suppose the demand for money is
NOT very sensitive to the interest rate.
Given this information, we know that:
(a) the LM curve should be relatively
flat.
(b) neither the IS nor the LM curve
will be affected.
(c) the IS curve should be relatively
flat.
(d) the IS curve should be relatively
steep.
(e) the LM curve should be
relatively steep.
21) Suppose the consumption
equation is represented by the
following: C = 500 + .4YD. Given this
information, the marginal propensity to
save is:
(a)
(b)
(c)
(d)
(e)
.25
.4
.6
1
none of the above
Use the information below to answer the
following questions:
C = 1000 + .5YD
I = 500
G = 1250
T = 1000
22) The equilibrium level of GDP for
the above economy equals:
(a) 1250
(b) 2250.
(c) 3250
(d) 4500
(e) none of the above
23) Suppose taxes decrease by 200
for the above economy. Given the above
information, we know that equilibrium
output will decrease by:
(a) 200.
(b) 400.
(c) It will not decrease but increase
by 200.
(d) It will not decrease but increase
by 400.
(e) none of the above
24) The equation for household
saving, S, for the above economy is:
(a) 1000 - .5Y
(b) -1000 + .5YD
(c) -1000 - .5YD
(d) 3350 + .5Y
(e) None of the above
Econ 232 Spring 2006
Midterm 2
25) Suppose nominal GDP in 2005
increased by 5% (over its previous level
in 2004). Given this information, we
know with certainty that:
(a) both the GDP deflator and real
GDP increased during 2005.
(b) real GDP increased during 2005.
(c) the GDP deflator increased
during 2005.
(d) More information is needed to
answer this question.
(e) GDP deflator increased but real
GDP might have gone down
26) Suppose there is a simultaneous
tax increase and open market purchase
of bonds. Which of the following must
occur as a result of this?
(a) output increases
(b) output decreases
(c) the interest rate decreases
(d) both output and the interest rate
decrease
(e) the interest rate increases
27) Suppose a one-year discount
bond offers to pay $1000 in one year
and currently sells for $950. Given this
information, we know that the interest
rate on the bond is:
(a)
(b)
(c)
(d)
(e)
5.3%.
9.5%.
10%.
90%.
110%.
28) For this question, assume that
individuals do NOT hold currency (i.e.,
c = 0) and required reserve ratio is
represented with q. The money
multiplier is equal to:
(a) 1/[c + q(1-c)].
(b) 1/q. Both are correct
(c) [c + q(1-c)].
(d) 1/(1-c).
(e) none of the above
29) We would expect which of the
following to occur when the central
bank conducts an open market sale of
bonds?
(a) an increase in the money
multiplier
(b) a reduction in the money supply
(c) an increase in money supply
(d) a reduction in the money
multiplier
(e) both C and D
30) Suppose investment spending is
very sensitive to the interest rate. Given
this information, we know that:
(a) the LM curve should be relatively
steep.
(b) the LM curve should be relatively
flat.
(c) neither the IS nor the LM curve
will be affected.
(d) the IS curve should be relatively
steep.
(e) the IS curve should be
relatively flat.
31) Suppose there is a simultaneous
tax cut and open market purchase of
bonds. Which of the following must
occur as a result of this?
(a) the interest rate decreases
(b) both output and the interest rate
increase
(c) output decreases
(d) the interest rate increases
(e) output increases
32)
Robinson Crusoe (RC) and
Friday (Friday) are living in an island.
They engage following economic
activities. In 2003 Friday catches 50 fish
and sells them to RC for 5 YTL each.
RC uses all of the fish to make 25 liters
of fish oil, all of which he sells to
Friday for 40 YTL per gallon. If these
are the only transactions that take place
in 2003, what is the GDP on this island
in 2003?
(a)
250 YTL
(b)
500 YTL
(c)
1000 YTL
(d)
1250 YTL
(e)
none of the above
Econ 232 Spring 2006
Midterm 2
33) Which of the following generally
occurs when a central bank pursues
contractionary monetary policy?
(a) the central bank purchases bonds
and the interest rate increases
(b) the central bank sells bonds and
the interest rate decreases
(c) the central bank purchases bonds
and the interest rate decreases
(d) the central bank sells bonds and
the interest rate increases
(e) none of the above
34) Use the following information to
answer this question: 90 million people
are working, 10 million are not working
but are looking for work, and 10 million
are not working and have given up
looking for work. The official
unemployment rate for that month is:
(a)
7.7%.
(b)
9.1%.
(c)
8.3%.
(d)
10%
(e)
25%.
35) An individual is said to be a
discouraged worker if he or she:
(a)
wants to work, and is actively
searching for a job.
(b)
is working, but prefers not to
work.
(c)
wants to work, but has
given up searching for a job
(d)
is working part time, but
would prefer a full-time job.
(e)
is working in jobs she/he is
not suited for.
36) The marginal propensity to save:
(a) the level of consumption that
occurs if disposable income is zero.
(b) the change in consumption
caused by a one-unit change in
disposable income.
(c) total income minus total taxes.
(d) the change in saving caused by
a one-unit change in disposable
income.
(e) the ratio of total consumption to
disposable income.
37) We know with certainty that an
equal and simultaneous increase in G
and T will cause:
(a) a reduction in output.
(b) no change in output.
(c) an increase in investment.
(d) an increase in output.
(e) None of the above
38) Which of the following will cause
a leftward shift in the money demand
curve?
(a) an open market sale of bonds by
the central bank
(b) an increase in the interest rate
(c) a reduction in income
(d) a reduction in the interest rate
(e) none of the above
39) Suppose a one-year discount
bond offers to pay $2000 in one year
and currently has a 25% interest rate.
Given this information, we know that
the bond's price must be:
(a) $2500 .
(b) $2000
(c) 1600
(d) 1000
(e) none of the above
40) Which of the following is
included as a component of money?
(a) currency on consumer’s pocket.
(b) currency on Central Bank’s vault
(c) bonds
(d) income
(e) all of the above