14.02 Principles of Macroeconomics Spring 03 Quiz 1 Thursday, March 6, 2003 7.30 pm – 9 pm Please answer the following questions. Write your answers directly on the exam. You can achieve a total of 100 points. There are 13 multiple- choice questions, followed by 2 long questions. Good luck! NAME: MIT ID NUMBER: TA: CLASS TIME: EMAIL:2 Multiple Choice Questions (39/100) Please circle the correct answer for each of the 13 multiple-choice questions. For each question, only one of the answers is correct. Each question counts 3/100. Question 1: Which of the following item(s) should NOT be added to total final production when measuring GDP? I. The purchase of a used car. II. The gas bought by the driver of a taxicab. III. The oil bought to heat your house. a) Only I b) Only II c) Only III d) I and II e) I, II and III. Question 2: Suppose that an economy produces two final goods, bread and beer: Good Year Quantity produced Price Bread 2002 100 1 Beer 2002 100 1 Bread 2003 50 2 Beer 2003 200 ½ Looking at the change from 2002 to 2003 we have that a) Nominal GDP increases by 25% b) Real GDP in 2002 dollars increased 25% c) Real GDP in 2003 dollars increased 25% d) All of the above e) None of the above Question 3: If the marginal propensity to consume increases, the multiplier on the goods market a) Increases b) Decreases c) Stays the same d) Indeterminate3 Question 4: Consider the following basic model of the goods market with the usual notation: Z = C + I + G I = I C = c0 + c1 ( Y – T ) By using the equilibrium condition, we can solve for equilibrium output. Given the equation for output, does a tax decrease or a government spending increase have a larger effect on equilibrium output in the model? a) Tax decrease b) Spending increase c) Same effect d) Indeterminate e) None of them has any effect at the equilibrium Question 5: Succumbing to pressure from the American Association of Retired People, the government increases social security payments to seniors by $1. By how much does G increase as a result of this action? a) 0 b) c1 c) 1 - c1 d) 1 e) c1 / ( 1 – c1 ) Question 6: A policy maker concerned with the short run decides to pursue new economic policy objectives. To his surprise, he discovers that the goods market model tells him that one of his policy objectives will decrease output in the short run. Which of the following could lead to lower output in the short run? a) Increased demand b) Increased government spending c) Increased savings d) Lower taxation e) Increased autonomous investment4 Question 7: The central bank undertakes an open market operation, in which it sells government bonds to Fastbucks Bank. As payment for the bonds, the central bank deducts the market value of the bonds from the reserve account that Fastbucks Bank holds with the central bank. Which of the following correctly states the expected impact of this open market operation on (i) the money supply, (ii) the price of bonds, and (iii) the interest rate. a) The money supply increases, the price of bonds increases and the interest rate decreases. b) The money supply decreases, the price of bonds increases and the interest rate decreases. c) The money supply increases, the price of bonds decreases and the interest rate decreases. d) The money supply decreases, the price of bonds decreases and the interest rate increases. e) The money supply increases, the price of bonds decreases and the interest rate increases. Question 8: Following the development of new ‘smart cards’ as a way of paying for goods, consumers decide to hold less money in the form of currency, and also decrease the balances in their checking accounts. Which of the following statements about the effect of these ‘smart cards’ on the velocity of money is correct? a) The velocity of money increases, because money demand is lower. b) The velocity of money decreases, because money demand is lower. c) The velocity of money increases, because nominal income is higher. d) The velocity of money decreases, because the interest rate is higher. e) The velocity of money does not change, because the acceleration rate of money is zero. Question 9: The central bank buys $100 in bonds from the general public. The banking sector’s reserve ratio θ is equal to 0.2. What will be the final change in the money supply following the central bank’s purchase of bonds? Assume that people hold only checking account balances, and do not hold currency. a) −$500 b) −$20 c) $20 d) $100 e) $5005 Question 10: If it does not want output to change, the central bank should do the following to accommodate a reduction in government spending: a) Expand money supply b) Contract money supply c) Leave money supply unchanged d) Sometimes b), sometimes c) Question 11: The stronger is the effect of the interest rate on money demand (i.e. the flatter the LM curve), then: a) the more effective are tax cuts in stimulating the economy b) the less effective are tax cuts in stimulating the economy c) the less effective is monetary policy d) both b) and c) are true e) both a) and c) are true Question 12: In the standard IS-LM framework, an increase in government spending: a) Decreases investment because interest rates increase. b) Has an ambiguous effect on investment as interest rates rise, but income rises as well. c) Is more likely to have a negative effect on investment, the steeper the LM curve. d) Both a) and c) are true. e) Both b) and c) are true. Question 13: The Gulf war in 1991 caused a sharp decrease in consumer confidence. Suppose that the only effect of a future war with Iraq is a drop in consumer confidence. If the government wants to neutralize the impact of the drop in consumer confidence on both GDP and the interest rate, the following policies are correct: a) Increase G and M. b) Increase G, decrease M. c) Decrease G, Increase M. d) Decrease G, decrease M. e) Increase G, leave M unchanged.6 Long Question I (37/100): Answer each of the 8 parts of the following long question. The country of Macronesia obeys our short-run model and starts off in equilibrium in both the goods market and the financial market. In the goods market, Macronesia’s government
View Full Document
Unlocking...