Econ 375: Intermediate Macroeconomics

May 7, 2002

Exam 4

Name: _________________________________

Part One: Circle the best answer for 2 points.

1. Suppose the economy experiences a leftward shift (reduction) in money demand. Based on your understanding of the IS-LM model, this reduction in money demand will tend to cause:

a. a reduction in income and an increase in the interest rate

b. a reduction in income and a reduction in the interest rate

c. an increase in income and an increase in the interest rate

d. an increases in income and a reduction in the interest rate

2. Which of the following is NOT a motive for holding money?

a. precautionary motive

b. speculative motive

c. profit motive

d. transactions motive

3. Suppose the Fed increases the money supply. In which of the following cases will this increase in the money supply likely have the greatest effect on income?

a. inelastic money demand and inelastic investment

b. inelastic money demand and elastic investment

c. elastic money demand and inelastic investment

d. elastic money demand and elastic investment

4. A reduction in autonomous exports will tend to cause

a. a leftward shift in the IS curve

b. a rightward shift in the IS curve

c. the LM curve to shift down

d. the LM curve to shift up

5. Which of the following events will cause an increase in the nominal money supply

a. an increase in P

b. a reduction in P

c. an increase in the interest rate

d. a reduction in the interest rate

e. none of the above

6. Which of the following events, all else fixed, will cause an increase (i.e., rightward shift) in the real money demand curve

a. a reduction in the interest rate

b. an increase in the price level

c. an increase in real income

d. all of the above

e. none of the above

7. A reduction in U.S. income would tend to cause

a. an increase in U.S. exports

b. an increase in U.S. imports

c. a reduction in U.S. trade deficit

d. a reduction in U.S. exports

8. Suppose the MPS = 0.1 and the MPIM = 0.1. Suppose autonomous consumption falls by 100. Given this information, we know that this reduction in autonomous consumption will cause income to fall by

a. 200

b. 300

c. 400

d. 500

9. Which of the following expressions represents real disposable income?

a. y- t

b. c+s

c. s

d. c

10. Which of the following is NOT included in the natural rate of unemployment?

a. frictional unemployment

b. structural unemployment

c. cyclical unemployment

d. none of the above

11. Suppose the U.S. is experiencing a trade deficit at the initial level of equilibrium output (income). Which of the following events would tend to reduce this trade deficit without causing a reduction in U.S. output?

a. increase in government expenditures

b. reduction in taxes

c. a depreciation of the U.S. dollar

d. increase in taxes

12. The anticipation of lower profits will likely cause

a. an increase in investment

b. a reduction in investment

c. have no effect on investment

d. cause a rightward shift in the investment demand curve

13. We know that the economy is in equilibrium when

a. s+t=i+g

b. s=i

c. s+t+im=i+g+x

d. c+s+t=c+i+g

14. The income identity indicates that real income (y) equals:

a. c + s + t

b. c + s + t + im

c. y - t

d. c + s + t + x

15. Suppose the U.S. economy experiences a simultaneous increase in supply of labor and reduction in labor productivity. Given this information, we know with certainty that:

a. per-capita real GDP falls

b. the real wage falls

c. employment falls

d. economic growth falls

16. An increase in the marginal product of capital will tend to cause

a. an increase in the demand for loanable funds

b. an increase in investment

c. an increase in the real interest rate

d. all of the above

e. none of the above

17. Based on your understanding of the loanable funds model, an increase in the budget surplus will cause

a. an increase in the supply of loanable funds

b. a reduction in the supply of loanable funds

c. a reduction in the demand for loanable funds

d. a reduction in the demand for loanable funds

18. Which of the following would be INCLUDED in GDP?

a. value of a purchase of stocks

b. value of auto parts purchased by an automobile company

c. value of capital goods purchased by businesses

d. value of household services

Part Two: Choose the best answer and explain what is wrong with the other choices. Draw graphs and show your calculations if necessary. (5 points each)

19. When the IS curve is perfectly interest-inelastic, we know that an increase in government spending will tend to cause

a. no change in the interest rate and an increase in income

b. no change in the interest rate and no change in income

c. an increase in the interest rate and no change in income

d. an increase in the interest rate and an increase in income

20.Which of the following events will cause the greatest reduction in equilibrium income?

a. D s_o = -100

b. D x_o = -75

c. D t_o = -100

d. D im_o = -100

Part Three: Answer 4 of the following 5 questions for 10 points each

21. During holiday periods, individuals typically increase their holdings of (demand for) money even though their income has not changed.

a. Explain what effect such a change in money demand will have on the LM curve.

b. If the central banks want to prevent the above change in money demand from affecting the position of the LM curve, what type of policy must the central bank pursue? Explain. You may draw graphs.

22. Assume at the initial level of equilibrium income that a trade deficit exists. What type of fiscal policy could be implemented to eliminate this trade deficit? What effect would this policy have on aggregate expenditures curve and domestic output (income)? Explain. You may use graphs.

23. Suppose autonomous consumption increases by $200 billion and taxes go up by $100 billion. MPC = 0.8. How do these changes affect the equilibrium level of real income? Show your work.

25. Based on your understanding of the loanable funds model and the model of economic growth, what are the long-run effects of an increase in the budget deficit on economic growth? Explain in detail. You may draw graphs.

26. Distinguish between the substitution effect and the income effect of a change in real wages. Suppose that the substitution effect outweighs the income effect. Draw the labor supply curve.