ECON 203-502
Name:
Spring 2013
Exam 3
UIN:
Instructor: Jinkook Lee
Major:
Part I) True / False (1.5pts. each)
1) Lower interest rates increase both consumption and investment spending.
(True / False)
2) An increase in the price level in the United States will reduce imports and increase exports.
(True / False)
3) On the 45-degree line diagram, the 45-degree line shows points where real aggregate
expenditure equals nominal GDP.
(True / False)
4) An increase in exports decreases aggregate demand.
(True / False)
5) An adverse supply shock causes the short-run aggregate supply curve to shift left, increasing
the price level.
(True / False)
6) At a long-run macroeconomic equilibrium, real GDP is always equal to potential GDP.
(True / False)
7) The money market model is essentially a model that determines the short-term nominal rate of
interest.
(True / False)
8) Ceteris paribus, an increase in the money supply will lower short-term interest rates.
(True / False)
9) Contractionary monetary policy refers to the Fed's decreasing the money supply and
decreasing interest rates to decrease real GDP.
(True / False)
10) The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate
demand.
(True / False)
Part II) Short Answer (2.5pts. each)
1) Household wealth is defined as the value of a household's
its
liability
.
assets
2) The marginal propensity to consume is defined as the change in
by the change in
disposable income
.
3) If the marginal propensity to save is 0.35, the multiplier is
4) The level of real GDP in the long run is
5) Prices or wages are said to be
demand or supply.
sticky
consumption
2.8
potential GDP
minus the value of
divided
.
.
when they do not respond quickly to changes in
6) Workers expect inflation to rise from 3% to 5% next year. As a result, this should shift the
short-run aggregate supply curve to
left
.
7) Fed's two main monetary policy targets are
8) Federal Fund Rates
money supply
and
interest rates
.
is the interest rate banks charge each other for overnight loans.
9) If the Federal Reserve raises or lowers interest rates too late, it could result in a __procyclical
______ policy that destabilizes the economy.
10) If FOMC decides to increase the money supply, it orders the trading desk at the Federal
Reserve Bank of New York to purchase
US Treasury Bill
.
Part III) Multiple Choices (2pts. each)
1) Which of the following is not a component of aggregate expenditure?
A) consumption spending
B) planned investment spending
C) actual investment spending
D) government spending
2) Consumption spending is $5 million, planned investment spending is $8 million, actual
investment spending is $8 million, government purchases are $10 million, and net export
spending is $2 million. Based on this information, which of the following is true?
A) There was an unplanned change in inventories.
B) Aggregate expenditure is equal to GDP.
C) Aggregate expenditure is greater than GDP.
D) Aggregate expenditure is less than GDP.
3) If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic
equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
4) The decline in consumer spending during the 2007-2009 recession was due in part to a
decrease in disposable income. The decline in consumption resulting from the decline in
disposable income caused a ____
____ the aggregate expenditure curve.
A) movement up along
B) movement down along
C) downward shift of
D) upward shift of
5) The consumption function describes the relationship between
A) consumption spending and national income.
B) consumption spending and aggregate income.
C) consumption spending and disposable income.
D) consumption spending and personal income.
Table 1
Consumption
(dollars)
$600
900
1,200
Disposable Income
(dollars)
$1,000
1,500
2,000
6) Refer to Table 1. Given the consumption schedule in the table above, the marginal
propensity to consume is
A) 0.5.
B) 0.6.
C) 0.75.
D) 0.8.
7) If firms are more pessimistic and believe that future profits will fall and remain weak for the
next few years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
8) U.S. net export spending falls when
A) the price level in the United States falls relative to the price level in other countries.
B) the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.
C) the value of the U.S. dollar decreases relative to other currencies.
D) the inflation rate is lower in the United States relative to other countries.
Figure 1
9) Refer to Figure 1. At point J in the figure above, which of the following is true?
A) Aggregate expenditure is less than GDP.
B) The economy has achieved macroeconomic equilibrium.
C) Actual inventories are less than planned inventories.
D) GDP will be decreasing.
Figure 2
10) Refer to Figure 2. Suppose that the level of GDP associated with point K is potential GDP.
If the U.S. economy is currently at point N,
A) firms are operating below capacity.
B) the economy is at full employment.
C) the economy is in an expansion.
D) the level of unemployment is above the natural rate.
11) Which of the following is one explanation as to why the aggregate demand curve slopes
downward?
A) Increases in the price level lower the interest rate and decrease consumption spending.
B) Increases in the price level lower the interest rate and decrease investment spending.
C) Increases in the U.S. price level relative to the price level in other countries lowers net
exports.
D) Increases in the price level raise real wealth and lowers consumption spending.
12) Which of the following will shift the aggregate demand curve to the left, ceteris paribus?
A) an increase in interest rates
B) an increase in disposable income
C) an increase in expected profits for firms
D) an increase in net exports
Figure 3
13) Refer to Figure 3. Ceteris paribus, a decrease in personal income taxes would be
represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
14) Refer to Figure 3. Ceteris paribus, an increase in firms' expectations of the future
profitability of investment spending would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
15) Changes in ________ do not affect the level of aggregate supply in the long run.
A) technology
B) the number of workers in the economy
C) the price level
D) the amount of accumulated capital equipment
16) A decrease in the price level will
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
17) If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look
like?
A) It is a horizontal line at $600 billion of GDP.
B) It is a vertical line at a level of GDP below $600 billion.
C) It is a vertical line at $600 billion of GDP.
D) It is a vertical line at a level of GDP above $600 billion.
Figure 4
18) Refer to Figure 4. Ceteris paribus, a decrease in the labor force would be represented by a
movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
19) Refer to Figure 4. Ceteris paribus, an increase in workers and firms adjusting to having
previously underestimated the price level would be represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Figure 5
20) Refer to Figure 5. Suppose the economy is at point C. If investment spending decreases
in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
21) The money market model is concerned with ________ and the loanable funds market model
is concerned with ________.
A) short-term real interest rates; long-term nominal interest rates
B) short-term nominal interest rates; long-term nominal interest rates
C) short-term real interest rates; long-term real interest rates
D) short-term nominal interest rates; long-term real interest rates
22) The money demand curve has a negative slope because
A) lower interest rates cause households and firms to switch from money to financial assets.
B) lower interest rates cause households and firms to switch from financial assets to money.
C) lower interest rates cause households and firms to switch from money to stocks.
D) lower interest rates cause households and firms to switch from money to bonds.
23) Buying a house during a recession may be a good idea if your job is secure because the
Federal Reserve often
A) raises interest rates during recessions.
B) lowers interest rates during recessions.
C) lowers income taxes during recessions.
D) sells Treasury bills to help the housing market.
24) Increases in the price level
A) increase the opportunity cost of holding money.
B) decrease the opportunity cost of holding money.
C) increase the quantity of money needed for buying and selling.
D) decrease the quantity of money needed for buying and selling.
25) Suppose the Fed decreases the money supply. In response households and firms will
________ short term assets and this will drive ________ interest rates.
A) buy; up
B) buy; down
C) sell; up
D) sell; down
Figure 6
26) Refer to Figure 6. In the figure above suppose the economy is initially at point A. The
movement of the economy to point B as shown in the graph illustrates the effect of which of the
following policy actions by the Federal Reserve?
A) a decrease in income taxes
B) an increase in the required reserve ratio
C) an open market purchase of Treasury bills
D) an open market sale of Treasury bills
27) If the Fed pursues expansionary monetary policy then
A) the money supply will decrease, interest rates will rise and GDP will fall.
B) the money supply will decrease, interest rates will fall and GDP will fall.
C) the money supply will increase, interest rates will rise and GDP will rise.
D) the money supply will increase, interest rates will fall and GDP will rise.
28) From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that
next year aggregate demand would grow significantly slower than long-run aggregate supply,
then the Federal Reserve would most likely
A) decrease interest rates.
B) increase interest rates.
C) decrease income tax rates.
D) increase income tax rates.
29) Contractionary monetary policy causes
A) aggregate demand to rise and the price level to rise.
B) aggregate demand to fall and the price level to fall.
C) aggregate demand to rise and the price level to fall.
D) aggregate demand to fall and the price level to rise.
Figure 7
30) Refer to Figure 7. In the figure above, if the economy in Year 1 is at point A and expected in
Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
A) lower interest rates.
B) raise interest rates.
C) lower income taxes.
D) raise income taxes.
Extra Credit (3pts.)
If the Fed pursues expansionary monetary policy then what happen in money market, loanable
fund market, and good market?
You need to show your understanding with graphical descriptions.