Final Exam (2010) - Macroeconomics (50 points)
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Answers to the multiple choice questions: (30 points)
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1. The Bank of Korea decreases money supply.
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10.
What would be the effects of on interest rates,
income, consumption, investment, prices in the short run? What about in the long run? Explain
using the IS-LM model and AD-AS model simultaneously. (10 points.)
2. Considering the current status of and prospects for the Korean economy, what would be the best
fiscal and monetary policy for Korea? Be sure to explain your answer logically using the material
learned in the class (10 points. Please write your answer on the back).
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Multiple choice questions. (15 points)
1. The FALSE statement about economic fluctuations is:
(1) Real GDP in Korea fluctuates around its average rate of growth.
(2) The fluctuations in output are called the business cycle.
(3) The business cycle is regular and predictable.
(4) During 2009, Korean economy experienced an economic recession.
(5) Economists generally believe that output moves towards its full employment level in the long run.
2. In the Keynesian-cross model, if investment, taxes, and government purchases are held constant, the
slope of the planned expenditure curve equals to:
(1) - MPC
(2) 1- MPC
(3) 1.0
(4)
-1.0
(5) MPC
3. In the Keynesian cross model of Chapter 10, if the MPC is 0.8, and government expenditure is
increased by $100 and taxes are decreased by $100, respectively, how much does income change?
(1) It increases by $100.
(4)
(2) It decreases by $100.
It decreases by $900.
(3) It increases by $500.
(5) It increased by $1,000.
4.Which of the following statements is FALSE?
(1) The IS curve represents all combinations of interest rate and income that would result in equilibrium
in the goods market.
(2) The LM curve represents all combinations of interest rate and income that would result in equilibrium
in the money market.
(3) The equilibrium condition in the goods market is:
(4) The equilibrium condition in the money market is:
Y  C (Y  T )  I (r )  G
M P  L (Y )
(5) The intersection determines the combination of Y and r that satisfys equilibrium in both goods and
money markets.
5. In the IS-LM model, when the MPC is 0.8, and government expenditure is increased by $100, ㅠ y
how much does income change?
(1) It increases by $100.
(4) It increases by $ less than 500.
(2) It increases by less than $100.
(3) It increases by $500.
(5) None of above.
6. If the government increases its tax revenue, then
(1) the LM curve would shift to the left.
(2) the LM curve would shift to the right.
(3) the IS curve would shift to the left.
(4) the IS curve would shift to the right.
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(5) the AD curve would shift to the right.
7. If the government increases its spending and the central bank decreases the money supply, then the
combined effect of these two policies would cause
(1) interest rate to rise and income to fall.
(2) both the interest rate and income to rise
(3) interest rate to rise but income cannot be determined from the information given.
(4) income to rise but interest rate cannot be determined from the information given.
(5) both cannot be determined from the information given.
8. If the short-run AS curve is horizontal and the long-run AS curve is vertical, then an increase in the
government spending will increase
in the short run and increase
in the long run.
(1) only prices; only output.
(2) only output; only prices.
(3) both prices and output; only prices.
(4) only output; both prices and output
(5) both prices and output; both prices and output.
9. If the short-run AS curve is horizontal and the long-run AS curve is vertical, then an increase in the
government tax revenue will
in the short run and
in the long run.
(1) increase only prices; increase only output.
(2) decrease only output; decrease only prices.
(3) decrease only prices; increase only output.
(4) increase only output; decrease only prices.
(5) increase both prices and output; only prices.
10. The monetary-policy rule that the Bank of Korea is currently following is
(1) an unemployment targeting.
(3) nominal GDP targeting.
(2) a steady rate of growth of the money supply.
(4) inflation rate targeting.
(5) There is no targeting.
11. If there is an adverse supply shock such as a sharp increase in oil prices, then in the short run.
(1) the AS curve would shift downward causing the price to increase and income to decrease.
(2) the AS curve would shift downward causing the price to decrease and income to increase.
(3) the AS curve would shift upward causing the price to increase and income to decrease.
(4) the AS curve would shift upward causing the price to decrease and income to increase.
(1) the AD curve would shift downward causing the price to decrease and income to decrease.
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12. Which of the following statements is FALSE?
(1) The inside lag is the time between a shock to the economy and the policy action responding to that
shock.
(2) The outside lag is the time it takes for policy to affect economy.
(3) Because of the existence of the inside lag and the outside lag, the stabilization policy can easily
stabilize the economy.
(4) Fiscal policy has a much longer inside lag than monetary policy.
(5) Monetary policy has a much longer outside lag than fiscal policy.
13. Which of the following does NOT describe macroeconomic policy adequately?
(1) It is called the stabilization policy.
(2) It is a demand-side policy
(3) It consists of fiscal policy and monetary policy.
(4) It aims at stabilizing business cycles.
(5) It aims at increasing the long-run growth rate of GDP.
14. Which of the following is a FALSE statement about automatic stabilizers
(1) They are policies that stimulate or depress the economy when necessary without any deliberate policy
change.
(2) They are designed to increase the lags associated with stabilization policy.
(3) They largely eliminate the business cycle.
(4) Their examples are income tax and unemployment insurance.
(5) The existence of automatic stabilizers is one of the arguments against active stabilization policy.
15. Which of the following statements is NOT true regarding the arguments regarding stabilization
policy?
(1) Proponents of active policy argue that recessions cause economic hardship for millions of people and
therefore the government should do some active role.
(2) Proponents of active policy argue that with the development of macroeconomic theory, we know
better how fiscal and monetary policy can respond to shocks and stabilize the economy.
(3) Opponents of active policy argue that policy lags are long and uncertain, making it very difficult to
predict the impact of policy, which makes it difficult to determine the appropriate policy.
(4) Opponents of active policy argue that economic forecasts are often wrong.
(5) Opponents of active policy argue that automatic stabilizers such as income tax and unemployment
insurance are not strong enough to stabilize the economy.
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