Mock Exam (Macroeconomics) Name___________________________________ READ THIS FIRST! The multiple choice questions are worth 1 points each.

You have to solve 5 out of 7 essay questions, worth 3 points each. The case study is worth 12 points. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which of the following is believed by some to have hindered the Japanese recovery? A) the state of the Japanese banking system C) excessive government spending B) relatively high inflation D) low interest rates

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2) When nominal GDP falls for a given period, we know with certainty that: A) either real output or the price level (GDP deflator) have decreased. B) the price level (GDP deflator) has decreased. C) real output has decreased. D) real output has increased and the price level has decreased. E) real output and the price level (GDP deflator) have both decreased. 3) Disposable income equals: A) the sum of consumption and saving B) income minus saving. C) income minus both saving and taxes. D) consumption minus taxes. E) none of the above 4) Which of the following generally occurs when a central bank pursues contractionary monetary policy? A) the central bank purchases bonds and the interest rate increases B) the central bank sells bonds and the interest rate decreases C) the central bank sells bonds and the interest rate increases D) the central bank purchases bonds and the interest rate decreases 5) An increase in the reserve ratio, q, will cause: A) a reduction in H. B) an increase in the monetary base (H). C) a reduction in the money multiplier. D) an increase in the money multiplier. E) none of the above

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6) We know with certainty that a tax increase must cause which of the following? A) an increase in the interest rate and an ambiguous effect on investment B) an increase in the interest rate and an upward shift in the LM curve C) no change in output if the Fed simultaneously pursues expansionary monetary policy D) an increase in the interest rate and a reduction in investment 7) A Fed purchase of securities will most likely have which of the following effects? A) a rightward shift in the IS curve C) an upward shift in the LM curve B) a leftward shift in the IS curve D) a downward shift in the LM curve

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8) For this question, assume there is perfect competition in the product market. Given this assumption, we know that m (in the price setting equation P = (1+ m)W) will equal: A) 1. B) 0. C) P. D) W/P. E) W.

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9) A reduction in the minimum wage will tend to cause which of the following? A) an upward shift in the WS curve B) a downward shift in the WS curve C) an upward shift in the PS curve D) a downward shift in the PS curve E) none of the above 10) The aggregate demand (AD) curve presented in the textbook has its particular shape because of which of the following explanations? A) An increase in P will cause a reduction in the real wage, an increase in employment, and an increase in output. B) An increase in the aggregate price level (P) will cause an increase in the interest rate and a reduction in output. C) As P decreases in a closed economy, goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services. D) An increase in the money supply (M) will cause a reduction in the interest rate, an increase in investment, and an increase in output. 11) For this question, assume that the economy is initially operating at the natural level of output. An increase in the minimum wage will cause: A) a reduction in the real wage in the medium run. B) an increase in the real wage in the medium run. C) no change in the real wage in the medium run. D) ambiguous effects on the real wage in the medium run.

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12) A reduction in the price of oil will tend to cause which of the following? A) an increase in the aggregate price level as output increases B) no change in the real wage in the medium run C) no change in the interest rate in the medium run D) an increase in investment in the medium run 13) Assume that expected inflation is based on the following:
et = t-1 . If = 1, we know that:

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A) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate. B) the actual unemployment rate will not deviate from the natural rate of unemployment. C) a reduction in the unemployment rate will have no effect on inflation. D) low rates of unemployment will cause steadily increasing rates of inflation. ESSAY. Write your answer in the space provided or on a separate sheet of paper. 14) Explain the three ways GDP can be measured. 15) For this question, assume that taxes are independent of income (i.e., the income tax rate is zero). Now suppose that fiscal policy makers wish to decrease equilibrium output by $500 billion. Further suppose that policy makers can choose one of the following two options: (1) change in government spending; or (2) change in taxes. Compare and explain the relative size of the changes in government spending and taxes needed to obtain this desired change in output. 16) Use the market for central bank money to answer this question. Graphically illustrate and explain what effect an increase in the reserve deposit ratio (q) will have on this market and on the equilibrium interest rate. 17) Based on your understanding of the IS- LM model, graphically illustrate and explain what effect a monetary expansion will have on output, the interest rate, and investment. 18) Graphically illustrate (using the WS and PS relations) and explain the effects of a reduction in unemployment benefits on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output. 19) Explain what the aggregate demand curve represents and why it is downward sloping. 20) Explain how the original Phillips curve differs from the expectations- augmented Phillips curve (or the modified, or accelerationist Phillips curve). 21) CASE STUDY
Should we worry about the consumer confidence? a) Read the following press release.

The Conference Board Consumer Confidence Index Declines Almost 12 Points March 25, 2008 The Conference Board Consumer Confidence Index, which had declined sharply in February, fell further in March. The Index now stands at 64.5 (1985=100), down from 76.4 in February. The Expectations Index declined to 47.9 from 58.0. The Present Situation Index decreased to 89.2 from 104.0 in February. (Source: The Conference Board) b) Explain and illustrate in the IS-LM framework the effect of the decline of consumer confidence. What happens to (i) output, (ii) the interest rate, (iii) investment. c) Which fiscal policy or policies could counteract the effect of a decline in consumer confidence? d) Read the following article. WASHINGTON (February 13, 2008) -- President Bush on Wednesday signed the Economic Stimulus Act of 2008, calling it a "booster shot" for the American economy. "The bill I'm signing today is large enough to have an impact, amounting to more than $152 billion this year, or about 1 percent of the GDP (gross domestic product)," the president said in the brief ceremony in the East Room of the White House. The government hopes the measure, which will send most Americans tax rebate checks by May, will either prevent a recession or make one relatively brief. The package also includes tax breaks for equipment purchases by businesses, as well as payments to disabled veterans and some senior citizens. The bipartisan measure moved through Congress at relative break- neck speed, going from initial discussions to enactment in less than four weeks. The package will pay $600 to most individual taxpayers and $1,200 to married taxpayers filing joint returns, so long as they are below income caps of $75,000 for individuals and $150,000 for couples. There is also a $300 per child tax credit. The rebates will put about $120 billion in the hands of individuals in the hope that they will spend it and boost a faltering U.S. economy. (Source: CNN) Is this measure consistent with your answer in part c)? e) How is the measure in part d) going to effect the budget deficit? f) How is he measure in part d) going to effect investment in the medium run?