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Final

Exam pre test

10 Pages
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Department
Economics
Course Code
ECON 2A03
Professor
Bridget O' Shaughnessy

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PRE-TEST #2 ANSWER KEY Econ 361, Spring 2014 Professor Khan Mohabbat 1. According to the Keynesian theory, an exogenous fall in the money supply is most likely to a. raise interest rates, investment, and aggregate spending. b. * raise interest rates and lower investment and aggregate spending. c. lower interest rates and raise investment and aggregate spending. d. lower interest rates, investment, and aggregate spending. 2. A fall in autonomous investment will shift the a. IS curve to the right toward higher interest rates and output. b. LM curve to the right towards lower interest rates and higher output. c. IS curve to the left towards higher interest rates and output. d. * None of the above 3. An decrease in the velocity of money for given levels of income and the interest rate would shift the a. * LM curve up. b. IS curve up. c. IS curve down. d. LM curve down. 4. If the consumption function is given by C = 100 + 0.D5Y , then an increase in taxes of 25 units will cause the IS schedule to shift to the left by a. 25 units. b. 50 units. c. * 75 units. d. 100 units. 5. If the money demand function is given by M = 50 + 0.2Y − 10r then a 10-unit increase in the quantity of money will cause the LM schedule to shift to the right by a. 10 units. b. * 50 units. c. 40 units. d. 100 units. e. 0 units. 6. Along the LM curve a. the money supply and interest rates are fixed but money demand varies. b. money demand is fixed but the money supply varies. c. government spending is fixed but income varies. d. * the money supply is fixed but money demand and interest rates vary. e. none of the above. 1 PRE-TEST #2 ANSWER KEY 7. According to Keynes, the equilibrium interest rate on bonds amounts to that rate at which the demand for bonds is a. greater than the existing stock of bonds. b. less than the existing stock of bonds. c. * equal to the existing stock of bonds. d. either less than or greater than the existing stock of bonds. 8. Assume that you purchased a $1,000 perpetual bond that pays a market interest rate of 5 percent. If you attempted to sell this bond today subsequent to an increased market rate of interest of 7.5 percent, then you a. * could only sell this bond at a capital loss. b. could sell this bond at a capital gain. c. would not be able to sell this bond. d. could exchange your bond yielding 5 percent for a bond yielding 7.5 percent on an even exchange basis. 9. According to Keynes, the speculative demand for money pertains to money held in anticipation of a(n) a. increase in bond prices. b. decrease in bond prices. c. rise in interest rates. d. fall in interest rates. e. * both b and c 10. According to the Keynesian model of the money market, the supply of money a. depends on the interest rate. b. * is chosen by the central bank. c. varies with the price level. d. varies with income. 11. The intuition behind the slope of the LM curve is that a. as the interest rate increases, the money supply increases and income increases. b. as the interest rate increases, investment and income decreases. c. * as income increases, money demand increases which increases interest rates. d. as income increases, money demand decreases which decreases interest rates. e. none of the above. 12. At any point on the LM curve a. there is labor market equilibrium. b. money supply equals money demand. c. money market equilibrium exists. d. both commodity and money market are necessary for equilibrium. e. * both b and c. 2 PRE-TEST #2 ANSWER KEY 13. Panel (b) in Figure 6.1 reflects a. low interest elasticity of money demand. b. * money demand to be highly interest elastic. c. money demand to be completely interest insensitive. d. None of the above 14. A shift in the money demand function that decreases the amount of money demanded at given levels of income and the interest rate shifts the a. * LM curve downward. b. LM curve upward. c. IS curve to the right. d. IS curve to the left. 15. In the Keynesian system, an increase in the money stock would a. increase the interest rate, which, in turn, would increase aggregate demand and income. b. decrease the interest rate, which, in turn, would decrease aggregate demand and income. c. * decrease the interest rate, which, in turn, would increase aggregate demand and income. d. decrease the interest rate but would have no effect on aggregate demand and income. 16. In the liquidity trap case where the LM schedule is nearly horizontal, a. both monetary and fiscal policy are highly effective. b. monetary and fiscal policy are ineffective. c. * monetary policy is ineffective and fiscal policy is effective. d. fiscal policy is ineffective and monetary policy is effective. 17. The higher the interest sensitivity of investment, the a. less effective is monetary policy and the more effective is fiscal policy. b. more effective are both monetary and fiscal policies. c. less effective are both monetary and fiscal policies. d. * less effective is fiscal policy and the more effective is monetary policy. 3 PRE-TEST #2 ANSWER KEY 18. The lower the interest sensitivity of the demand for money, the a. more effective is fiscal policy and the less effective is monetary policy. b. * more effective is monetary policy and the less effective is fiscal policy. c. less effective are both monetary and fiscal policies. d. more effective are both monetary and fiscal policies. 19. Assume the marginal propensity to consume is .75. To offset a fall in income of 100, the government should a. increase taxes by $20. b. cut taxes by $25. c. * increase government spending and taxes by 100. d. cut taxes by $20. e. both c and d. 20. In the closed economy IS-LM model, an increase in government spending crowds-out a. prices. b. the money supply. c. taxes. d. * investment. 21. An decrease in the velocity of money will shift the a. IS curve up. b. * LM curve up. c. LM curve down. d. IS curve down. Figure 8.1 22. According to Figure 8.1, a decrease in the money stock a. lowers the interest rate t1 r . b. * raises the interest rate to r . 2 c. leaves the interest rate 0t r . d. None of the above 4 PRE-TEST #2 ANSWER KEY Figure 8.2 23. With respect to Figure 8.2, an increase in government spending a. shifts the IS curve to the left by ∆G(− b/1 − b). b. shifts the IS curve to the right by ∆G(1 − b/1 − b). c. * shifts the IS curve to the right by ∆G(1/1 − b). d. does not shift the IS curve. Figure 8.3 24. With respect to Figure 8.3, the horizontal distance by which the IS curve will shift with a change in taxes is equal to a. * ΔT (− b/1 – b). b. ΔT(1/1 – b). c. ΔT(1 – b/1 – b). d. ΔT(1 + b/1 + b). 5 PRE-TEST #2 ANSWER KEY 25. In the case where the LM schedule is relatively steep and the IS schedule is relatively flat, the most effective policy would be a change in a. * money supply. b. government expenditures. c. government spending financed by a change in taxes. d. taxes. Figure 8.4 26. As shown in Figure 8.4, for income to be unchanged when there is an autonomous decline in investment, the interest rate would have to a. rise to r . 0 b. * fall to 2. c. remain constant at r1. d. None of the above 27. A higher interest elasticity of investment demand leads to a a. steeper IS curve. b. * flatter IS curve. c. steeper LM curve. d. flatter LM curve. 28. Monetary policy will be a. less effective the higher the interest elasticity of investment, and thus the steeper the IS schedule. b. * more effective the higher the interest elasticity of investment, and thus the flatter the IS schedule. c. equally effective regardless of whether or not the interest elasticity of investment is higher or lower, or the IS curve is flatter or steeper. d. more
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