Question

10. If the marginal propensity to consume is 0.75 and investment spending decreases by $20 billion. Suppose all other aggregate expenditure components are autonomous, based on the Keynesian model, what will be the overall effect on GDP?

Select one:

a. GDP will decrease by $20 billion

b. GDP will increase by $15 billion

c. GDP will decrease by $80 billion

d. GDP will increase by $30 billion

e. GDP will decrease by $26.7 billion

11. One of the most serious effects of a banking panic (bank run) is that

Select one:

a. banks will not earn as much profit

b. banks will no longer be trusted by the public

c. people will not place their excess money in banking accounts

d. people may lose any accrued interest on their accounts

e. large withdrawals of cash lead to a severe decrease in reserves and ultimately in the money supply

12. Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant?

Select one:

a. substitution bias

b. introduction of new goods

c. unmeasured quality change

d. income bias

e. None of the above

13. The demand for money

Select one:

a. is the demand for bonds

b. is the demand for loans

c. increases whenever the price level falls

d. reflects the wealth or asset allocation problem that people face

e. shows the people always demand as much money as possible

14. A rightward shift of the economy's labor supply curve would result from a(n)

Select one:

a. cut in income tax rates or an increase in welfare benefits to the needy

b. cut in income tax rates or a cut in benefits to the needy

c. increase in income tax rates or a cut in benefits to the needy

d. increase in income tax rates or an increase in benefits to the needy

e. cut in income tax rates or a freeze on benefits to the needy

15. Investment from abroad (or foreign direct investment)

Select one:

a. is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries

b. is viewed by economists as a way to increase growth

c. noften requires removing restrictions that governments have imposed on foreign ownership of domestic capital

d. All of the above are correct

e. None of the above is correct

16. Countercyclical fiscal policy has a serious problem with

Select one:

a. the timing of its enactment and impact

b. the easy reversibility of policy

c. the tendency of the central bank to immediately counter government's action

d. the courts as it has been held to be unconstitutional

e. Presidential executive orders

17. When implementing monetary policy, the variable the Federal Reserve watches most closely is the

Select one:

a. required reserve ratio

b. federal funds rate (Fed funds rate)

c. long term bond rate

d. national debt

e. short-term corporate bond rate

18. If there is a surplus of the domestic currency at a fixed exchange rate,

Select one:

a. the currency will depreciate

b. the currency will appreciate

c. the country must switch to a floating exchange rate

d. the central bank must buy up that excess supply or the domestic currency will depreciate

e. the central bank must buy up that excess supply or the domestic currency will appreciate

19. If the central bank lowered the required reserve ratio,

Select one:

a. excess reserves would decrease

b. the money supply would decrease

c. the money supply would increase

d. banks would borrow more from the central bank

e. loans would earn more interest

Answer 1

10. Multiplier = 1/(1-MPC) = 1/(1-0.75) = 4. Change in GDP = 4 * change in investment = 4*-20 = -80 billion.

c. GDP will decrease by $80 billion

11. e. large withdrawals of cash lead to a severe decrease in reserves and ultimately in the money supply. People will rush to banks if their money is not insured and this results in massive withdrawals. Hence money supply decreases as currency deposit ratio surges.

12. a. substitution bias. This is because consumer would substitute cheaper products when inflation is increasing but the same is not captured by CPI as its basket of goods is fixed.

13. d. reflects the wealth or asset allocation problem that people face

14.a. cut in income tax rates or an increase in welfare benefits to the needy

15. d. All of the above are correct

16.a. the timing of its enactment and impact

17.b. federal funds rate (Fed funds rate)

18. d. the central bank must buy up that excess supply or the domestic currency will depreciate

19.c. the money supply would increase