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ECO 100 Review - Macroeconomics.pdf

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Department
Economics
Course
ECO102H1
Professor
All Professors
Semester
Winter

Description
1 ECONOMICS 100 MACROECONOMICS REVIEW SPRING 2012 Almost all of the following questions have appeared on final exams. Trade sometimes appears as a question in the Macro portion of the exam, so there are some questions on that topic here too. Answers are provided on the last page. As suggested in the preamble to the Micro Review, you might consider trying these questions, without peeking at answers, in 70 minutIf you are going to do that, wait until we have covered the foreign exchange market in the final lectures. 1. Consider the aggregate expenditure (AE) model with a stable price level. Suppose that an economy is in equilibrium initially. If interest rates increase, then: a. the government will automatically increase its expenditures, which will lead to an increase in real GDP b. the aggregate expenditure function will shift upward and real GDP will rise c. the aggregate expenditure function will shift downward and real GDP will fall d. consumption expenditures will rise and investment expenditures will fall, thereby leaving real GDP unchanged e. investment expenditures will fall, but this will induce a rise in consumption expenditures so that the overall fall in income is less than the initial fall in investment. 2. Which of the following will cause the aggregate demand (AD) curve to shift to the right in the current period? a. a permanent increase in interest rates (at a given price level) b. an increase in government transfer payments to residents c. an increase in taxes d. a decrease in government spending on goods e. a decrease in the money supply. 2 3. The impact of monetary policy on real output (or real GDP) will be greater, the: a. flatter the demand for money (or LP = Liquidity Preference) curve and the investment demand (or MEI = Marginal Efficiency of Investment) curve b. steeper the demand for money (or LP) curve and the investment demand (or MEI) curve c. flatter the demand for money (or LP) curve and the steeper the investment demand (or MEI) curve d. steeper the demand for money (or LP) curve and the flatter the investment demand (or MEI) curve e. steeper the demand for money curve (or LP) and the flatter the aggregate expenditure curve. 4. Consider the Keynesian constant price model with a money market. A tax cut in Canada, with a flexible foreign exchange rate, will cause: a. a decrease in the interest rate, which will lead to an increase in the Canadian price of the U.S. dollar (i.e. decrease in US price of Canadian Dollar) b. a decrease in the interest rate, which will lead to an decrease in the Canadian price of the U.S. dollar (i.e. increase in US price of Canadian Dollar) c. an increase in the interest rate, which will lead to an increase in the Canadian price of the U.S. dollar (i.e. decrease in US price of Canadian Dollar) d. an increase in the interest rate, which will lead to a decrease in the Canadian price of the U.S. dollar (i.e. increase in US price of Canadian Dollar) e. no change in the interest rate. 5. We observe an increase in the price level and a decrease in real GDP. Which of the following is a possible explanation? a. the demand for investment goods (or MEI) has increased b. aggregate expenditure has decreased c. the price of raw materials has increased d. the stock of capital has increased e. the money supply has increased. 3 6. A household can: a. only consume or pay taxes out of disposable income b. only consume, save, or pay taxes out of disposable income c. only consume or save out of disposable income d. only consume out of disposable income e. do none of the above. 7. When the Canadian dollar value of foreign exchange rises (i.e., the Canadian dollar falls relative to the value of foreign currencies), all else constant: a. the demand for Canadian exports will rise b. the demand for Canadian exports will fall c. the demand for Canadian exports will be unaffected d. the Bank of Canada is obligated by law to buy dollars e. the Bank of Canada is obligated by law to sell dollars. 8. If real GDP is not at its equilibrium value: a. government intervention is necessary to make sure that real GDP changes in the correct direction b. real GDP will change until it reaches an equilibrium level at the capacity output level of the economy c. there must be excessive inflation in the economy d. there must be excessive unemployment in the economy e. there will always be a tendency for GDP to change until planned expenditures equal real GDP. 9. If the marginal propensity to consume out of real GDP is 0.75, and the marginal propensity to import is 0.10, then the marginal propensity to spend on domestic output out of real GDP is: a. 0.50 b. 0.65 c. 0.15 d. 0.45 e. 0.85 4 10. In an economy where real GDP is at the equilibrium level and prices are stable, there is significant unemployment in the economy. Which one of the following statements is true if the government were to increase taxes by $10 million and were to use these funds to increase government expenditures on domestically produced goods? a. there will be no change in the level of GDP b. there will be a decrease in consumption c. the autonomous level of exports will increase d. there will be an increase in the level of GDP e. the aggregate demand curve will shift to the left. 11. A rightward shift in the aggregate demand (AD) curve could be caused by all of the following EXCEPT: a. a decrease in imports b. a decrease in tax rates c. an increase in exports d. an increase in the price level e. a decrease in the rate of interest. 12. Suppose that investment increases by $10 billion. Which of the following would reduce the effect of this increase in autonomous expenditure on equilibrium real GDP? a. an increase in the marginal propensity to consume b. a decrease in the marginal propensity to import c. a decrease in the marginal tax rate d. a steeper aggregate supply curve e. a flatter aggregate supply curve. 13. Consider a simple economy, where there are no taxes and no transfer payments, and the marginal propensity to consume out of disposable income is 0.75, and that marginal propensity to import is 0.25. Suppose that investment is autonomous and rises by $100. As a result, equilibrium income will rise, with the components of the rise consisting of a rise in investment of $ and a rise in consumption of domestic goods of $ . a. 100 200 b. 100 100 c. 50 150 d. 100 150 e. 0 200 5 14. "Gains from trade" means that: a. both countries have eliminated their economic problems b. one country gains while another country loses c. both countries gain by expanding their production possibility frontier d. both countries see the prices going down for both goods e. both countries gain by consuming beyond their production possibility frontier. 15. International trade according to comparative advantage allows each country to consume by comparison with its before-trade consumption: a. more of the goods it exports but less of the goods it imports b. more of the goods it imports but less of the goods it exports c. more of both goods it exports and goods it imports d. less of both goods it exports and goods it imports e. none of the above. 16. If government revenue exceeds government spending (including transfer payments), the federal government's budget balance is , and the government has a budget . a. negative; deficit b. positive; surplus c. positive; deficit d. negative; surplus e. zero; deficit 17. All else the same, as the economy enters a recession: a. tax receipts tend to rise and interest payments on the public debt tend to rise b. tax receipts and government transfer payments tend to rise c. interest payments on the public debt and tax receipts both tend to fall d. government transfer payments tend to rise and tax receipts tend to fall . Hint: Consider a Tax function of the form T = lst +tY, where lst = lump sum taxes (autonomous taxes) and t = “marginal propensity to tax” = ∆T/∆Y. 6 18. Which of the following statements is correct for the term `net investment'? a. net investment may be negative b. net investment represents the total increase in housing, non- residential construction and machinery and equipment produced in a country in one year c. net investment equals replacement investment d. net investment equals gross investment e. none of the above is corre
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