Reference no: EM131022098
SECOND MIDTERM
Part I: Multiple Choice Questions
Use the following simple Keynesian model to answer the next two questions.
C = 300 + 0.9 (Y - T)
I = 500
G = 300
T = 400
Where C is household consumption expenditure, I is investment expenditure, G is government expenditure, and T is taxes.
1. The equilibrium level of consumption is
7400
6600
5400
6960
6000
2. Given the above information, suppose the government changes its tax policy into a proportional tax (i.e., now the tax collected is based on income level). We observe that under the new tax policy, an increase of $100 million of government purchases of final goods and services causes the equilibrium GDP to increase by $217 million. The marginal tax rate is approximately
40%
44%
54%
30%
46%
3. Which of the following statements is TRUE?
In the Classical Model, a tax cut will increase the consumption of households so real GDP will increase.
In the Classical Model, an increase in the money supply will drive the price level up so that real GDP will increase.
In the Keynesian Model, an increase in government expenditure will crowd out private spending so real GDP will stay unchanged.
In the Keynesian Model, a decrease in taxes of $10 generates a smaller effect on real GDP than does an increase in government spending of $10.
In the Keynesian Model, an increase in the money supply will drive the interest rate down so real GDP will decrease.
Consider the following Keynesian Model to answer the next two questions.
C = 200 + 0.5(Y - T)
I = 200
G = 300
T = 200 + 0.2Y
4. What is the output that makes saving equal to zero?
1000
750
600
500
400
5. Suppose the government decides to increase its spending from 300 to 600. At the new equilibrium, which of the following is TRUE? The government is running a
Budget surplus of 100.
Budget surplus of 550.
Budget deficit of 100.
Budget deficit of 650.
Balanced budget.
6. Under the Classical Model, which of the following statements is FALSE:
All markets clear.
Employment and real output are dependent on the money supply.
Prices are flexible.
The desired ratio of money held to income is not affected by prices or real output.
In the long run, demand management policy is both ineffective and unnecessary.
7. Suppose that the aggregate expenditure is given by the following formula:
AE = C + I + G + (X - M)
In this setting, I is defined as spending on:
A. Private investment and government investment.
B. New home construction and purchases of plant and equipment.
C. New home construction and purchases of plant and equipment, plus unintended inventory changes.
D. New home construction and purchases of plant and equipment, minus unintended inventory changes.
E. Private investment and government investment, less unintended inventory changes.
8. In the Classical long-run Model, which of the following policies will cause the full employment level of output to increase?
The government increases transfers for unemployed workers.
The government raises corporate profit taxes.
The government cuts subsidies for education and training programs for unemployed workers.
The government cuts income tax rates.
The government increases income tax rates.
9. Which of the following is FALSE?
At full employment there is no frictional unemployment.
Leakages equal injections in equilibrium.
The CPI index in the base year is always 100 (or 1).
The tax multiplier is always negative.
If the economy operates at full employment, then the point at which it operates will be on the production possibility frontier.
10. The tendency for increases in government spending to cause reductions in private investment and consumption is called
Expansionary fiscal policy.
Inflationary monetary policy.
The crowding out effect.
Demand management policy.
Market clearing condition.
11. Economic growth is best defined as
The rate of growth of employment.
The long-run increase in total output.
The rate of increase in economic productivity.
The cyclical changes in total output.
The rate of growth of the price level.
12. When the economy is in equilibrium, the Keynesian model predicts that
There will be no unplanned changes in inventory.
Planned savings equal zero.
There is no unemployment.
Any change in spending will have no effect on output.
The price level will move in order to restore equilibrium whenever any small change occurs.
13. Which of the following is TRUE?
At any level of employment, labor productivity can be calculated by dividing total output by total employment.
Labor productivity is defined as the Gross Domestic Product divided by the labor force.
On a graph that has on the horizontal axis employment and on the vertical axis real output, labor productivity for a particular level of output equals the slope of a line from the origin to a point on the production function that represents that level of output.
A and C
A, B and C
14. Which of the following statements is TRUE?
In the Classical Model economic booms or recessions occur because the labor market is not in equilibrium.
The Keynesian Model explains the occurrence of booms and recessions as the natural outcome of a spending shock in the economy.
Increases in capital, holding everything else constant, will increase labor productivity.
A, B, and C are true.
B and C are true.
15. In the loanable funds market we know that
The supply of loanable funds is the level of saving available in financial markets.
The demand for funds is positively related to the interest rate.
An increase in government spending, holding everything else constant, will lead to an increase in saving, a decrease in investment, and no change in the interest rate.
A, B, and C are true.
A and B are true.
16. An increase in labor demand, holding everything else constant, will
Cause real wages to increase.
Decrease labor productivity for the economy.
Shift the aggregate production function upwards and to the left as firms hire more units of labor.
A, B, and C are true.
A and B are true.
17. According to the Classical Model an increase in the money supply of 20% will
Have no impact on the economy since output is always at the full employment level of output in the Classical Model.
Result in a 20% increase in the price level.
Result in a 20% increase in real output.
Result in a 20% increase in both the price level and real output.
Cause people to want to hold more money and as households reduce their spending in the aggregate we will see the price level decrease in the economy.
18. The marginal propensity to consume
Is the slope of the consumption function.
Is the ratio of the change in consumption to the change in disposable income.
Is the reciprocal of the marginal propensity to save.
Tells us how much consumption changes by when disposable income increases by one dollar.
A, B, and D are true statements.
19. Suppose the government decides that running a deficit is not a good thing for the economy. In the budget for the coming year, the government decides to reduce the size of the deficit (with hopes of eventually eliminating the yearly deficit). A reduction in the size of the deficit (holding everything else constant) will
Cause real interest rates to fall.
Lead to increases in investment and decreases in consumption.
Have no impact on the loanable funds market.
Lead to increases in saving.
Crowd out investment.
20. In the Classical Model, demand management policies are
Generally effective in the short run.
Effective at stimulating the economy through increases in government spending and money supply adjustments.
Ineffective at stimulating the level of real GDP but may lead to inflationary pressures in the economy.
Not possible since the model does not allow the level of government spending or the level of the money supply to vary.
A and B are true.
Part II: Short Essay Questions
Below are four different baskets of items. Choose two baskets and write a short essay about each basket utilizing each term in the list. Explain how the terms relate to one another. Where appropriate use graphs or examples to illustrate these relationships. Think before you write so that your essay indicates organized thought. Be sure to use standard English and complete sentences. Assume that the grader is a blank slate waiting to be educated by you: MAKE NO ASSUMPTIONS ABOUT WHAT THE GRADER KNOWS PRIOR TO READING YOUR ANSWER. Scores on this question will depend on clarity of explanation, degree of understanding and knowledge illustrated, organization of answer, English grammar, and supporting illustration.
Basket 1:
Loanable funds market
Saving
Government deficit
Supply of funds
Demand for funds
Say's law
Basket 2:
Labor market
Labor supply
Labor demand
Aggregate production function
Labor productivity
Changes in technology
Real GDP
Basket 3:
Autonomous consumption
Marginal propensity to consume
Marginal propensity to save
Consumption function with respect to income
Consumption function with respect to disposable income
Basket 4:
Economic growth
Costs of economic growth
Pro-growth policies
Why is economic growth difficult for some countries?
1.
2.
3. Use the following information to answer the next question.
Autonomous consumption = 100
MPC = .5
T = t0 + .2Y where t0 = autonomous taxes
I = 100
G = 100
(X - M) = 5
A. The equilibrium level of output for this economy is _____________
B. Consumption when this economy is in equilibrium equals _________________
C. Saving when this economy is in equilibrium equals ___________
D. Taxes when this economy is in equilibrium equals ____________
E. The tax expenditure multiplier for this economy equals ____________
F. The multiplier for this economy equals _____________
G. Suppose the full employment output for this economy is $800. In order to reach this full employment level of output government spending would need to change by _________________________________________________________ (be sure to indicate the direction of change).
H. Suppose instead of changing government spending, this level of full employment output was reached by changing autonomous taxes. Autonomous taxes would need to change by _________________________________________________in order for this economy to reach the full employment level of output. (Be sure in your answer you indicate the direction of change.)