PRINCIPLES OF MACROECONOMICS

FINAL EXAM: SAMPLE #2

Duration - 3 hours
Aids Allowed: Non-programmable calculators only
THERE ARE 100 MARKS IN THIS EXAM. THERE ARE TWO PARTS
Part I

Ten macroeconomic questions of which you are expected to answer any eight
(10 marks each for a total of 80)
If you answer more than eight questions without clearly indicating the eight
you wish marked, the eight lowest marks will count as your eight.

Part II

10 multiple choice questions worth 2 marks each for a total of 20. Wrong
answers will not be deducted from right in grading Part II.

All questions are to be answered in the spaces provided in this question paper booklet
Do not remove any pages or add any pages. No additional paper will be supplied.
The blank backs of pages may be used for rough work. Show your work where applicable.
PRINT YOUR NAME AND STUDENT CLEARLY BELOW
Student Name: ______________________________________________________
(Family Name)
(Given Name)
Student Number: ______________________________
PUT YOUR NAME AT THE TOP OF EACH PAGE.
THERE ARE 13 PAGES TO THE EXAM
Marks Awarded
#1
#2
#3
#4
#5
#6
#7
#8
#9
#10
M
C

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

PART I : Answer only 8 of the 10 questions
Place your answers (and work where necessary) in the space provided.
1.

Prices Indices (10 marks)

1997

Rice (kilo)
Potatoes (kilo)

Price/unit
$1.50
$2.00

2000
Quantity
60
30

Price/unit
$2.50
$1.20

Quantity
40
50

The above table gives data for the price/unit and quantity of Rice and Potatoes
consumed by the average student in 1997 and 2000. Assuming that 1997 is the base
year, calculate the following values.
a) nominal student consumption in 2000 (1 mark)
1 mark: correct setup (formula or numbers): 2.50*40 + 1.20*50= $160
b) the consumer price index for 2000 (3 marks)
1 mark: correct numerator (2.5*60 + 1.2*30) = 186
1 mark: correct denominator = 1.5*60 + 2 * 30 = 150
1 mark: correct answer = 100*186/150 = 124
c) real consumption in 2000 relative to 1997 according to the consumer price index
(1 marks)
1 mark: right answer (or consistent with a) and b)) = $160/124 =$129
d) the total inflation between 1997 and 2000 relative to 1997 (1 mark)
1 mark: (124 100)/100 = 24 % (or consistent with b)
e)real consumption in 2000 according to the GDP deflator measure using CPI (1 mark)
1 mark: = 160 from 1.5*40 + 2 * 50 [or could also divide Nom by deflator]
f) the GDP deflator for 2000 given 1997 as the base year (3 marks)
1 mark: correct numerator = 2.5*40 + 1.2*50
1 mark: correct denominator = 1.5*40 + 2 * 50
1 mark: correct answer = 100*160/160 = 100

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

2.

National Accounts (10 marks)

The following data are from the National Accounts of Canada for 1980 ($Billions)
Corporate Profits (before Taxes)
65,000
Interest and Miscellaneous Investment Income
45,000
Gross Investment
120,000
Net Investment Income of Non-Residents
20,000
Government Spending
130,000
Wages and Salaries and Supplementary Labour Income
330,000
Government Transfer Payments
55,000
Depreciation (Capital Consumption Allowances)
70,000
Exports
160,000
Net Income of Unincorporated Businesses (Farm and non-Farm)
30,000
Imports
155,000
Consumption
350,000
Corporate Taxes
20,000
Personal Taxes
25,000
Indirect Taxes Less Subsidies
60,000
Retained Earnings (Undistributed Corporate Profits)
30,000
Rent (Rental Income)
5,000
Calculate (show your work)
a) Net Domestic Income calculated from Factor Incomes (2 marks)
1 mark: correct except for one mistake
1 mark: correct answer: = 330 + 65 + 30 + 5 + 45 = 475,000 (must do it this way not as below)
b) Gross Domestic Product from Net Domestic Income (1 mark)
1 mark: = 475 + 70 + 60 = 605,000
c) Gross Domestic Product from Aggregate Expenditure (1 mark)
1 mark: missing only one number
1 mark: 605,000 = from 350 + 120 + 130 + 160 155 (must be correct since same as b)
d) Personal Income (1 mark)
1 mark: 475 20 30 + 55 = 480,000 (must be correct)
e) Personal Savings (1 mark)
1 mark: = 480,000 25,000 350,000 = 105,000 (or consistent with their mistake in d))
f) Net Domestic Product (1 mark)
1 mark: = 475 + 60 = 535,000 (or 605 70)
g) Gross National Product (1 mark)
1 mark: = 605 - 20 = 585,000 (must be correct)
h) Dividends
1 mark: = 15,000 from 65,000 30,000 20,000

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

3.

MacroModel (10 marks)

An economy has the following set of macroeconomic equations.

Consumption:
C = 445 + 0.9Yd Exports:
X = 640
Investment:
I=
65 + 0.08Y Imports:
IM = 150 + 0.2Y
Government Spending G = 510
Net Taxes (Taxes Transfers) T = -30 + 0.2Y
(note that net fixed taxes are 30 not simply 30)
a) Calculate the Aggregate Expenditure equation. (2 marks)
1 mark: calculate correct constant term = 1,537
1 mark: calculate correct induced term = 0.6Y
from (say) AE = 445 + 0.9(Y (-30 + 0.2Y) + 65 + 0.08Y + 510 + 640 (150 + 0.2Y)
= 1,537+ 0.6Y
b) Calculate the value of Equilibrium Income (1 mark)
1 mark: = 3,842.5 from 1,537/(1 0.6) or consistent with their answer in a)
IN GENERAL, MARK CORRECT IF THE METHOD IS CORRECT BUT THE ANSWER IS
WRONG BECAUSE THEY MADE A MISTAKE IN a).
c) What is the change in Inventories at GDP (Y) equal to 4,000? (2 marks)
1 mark: AE = 3,937 from something like 1,537 + 0.6*4,000 (or consistent with a))
1 mark: Change in Inv = 4,000 3,937 = +63 (must not be negative)
(Give marks to students who divide 4,000 by 2.5 to get 1600 1537 = +63)
d) Suppose that there is a recessionary gap of 225.
i) What change in government spending will eliminate the recessionary gap? (1 mark)
1 mark: = +90 from 225 * 0.4 or 225/(1 0.6) or consistent with multiplier from a)
ii) What change in fixed taxes will eliminate the recessionary gap of 225? (2 marks)
1 mark: recognition of fixed tax multiplier as 0.9/(1 0.6) = 2.25 or any use of 0.9*225 and
the multiplier even without calculation of fixed tax multiplier(Dont worry about the
negative sign here) or consistent with multiplier from a)
1 mark: = -100 (must be negative) from some work such as 225*0.9*2.5
iii) What change in fixed transfer payments will eliminate the recessionary gap? (1
mark)
1 mark: = +100 (must be positive) with some work such as 225/2.25 or consistent with
multiplier from a)

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

4.

Money Supply (10 marks)

Assume that the following conditions hold in Canada's banking system: deposits are all
demand deposits, the required reserve ratio for deposits is 8% [0.08], there are neither
excess reserves nor excess circulation, and banks hold all interest bearing assets as
loans.
Suppose that the Bank of Canada has an outstanding currency issue of $53 billion; the
chartered banks have $3 billion worth of deposits at the bank of Canada; and the
currency in circulation (i.e., in the hands of the public) is $31 billion.
a) What is the money supply at equilibrium? (1 mark)

1 mark: = 343.5 from something like 31 + (53 31 + 3)/0.08

b) What is the amount of loans at banks at equilibrium? (1 mark)
1 mark: = 287.5 from something like 312.5 25 or (64 38 + 2)/0.125 - 25
Now calculate the change in reserves and in the money supply at the new equilibrium
for each of the following circumstances given the above information.
c) The Bank of Canada spends $80 million Canadian to buy $US in the foreign exchange
market.
i) the change in reserves is? (1 mark)
1 mark: +80 (m) (must be positive)
ii) the change in money supply is? (1 mark)
1 mark: = +80m/0.08 = +$1000m (need not be negative if mark already lost for positive in i)
d) The public permanently increases currency in circulation by $50 million to avoid taxes.
i) the change in reserves is? (1 mark)
1 mark: -$50 m (must be negative)
ii) the change in money supply is? (1 mark)
1 mark: = -$575 m from +50 50/0.08 (need not be negative if lost negative mark in i)
e) The Federal Government spends $180 million from $210 million in taxes and deposits
$10 millon in the Bank of Montreal and $20 million in the Bank of Canada.
i) the change in reserves is? (1 mark)
1 mark: = -20 m (must be negative)
ii) the change in money supply is? (1 mark)
1 mark: = -$250m from -20/0.08 (need not be negative if mark lost for wrong sign in i)
f) The Bank of Canada buys $30 million in bonds from the Toronto-Dominion bank and
switches another $30 million to the Bank of Nova Scotia from federal government
deposits at the Bank of Canada.
i) the change in reserves is? (1 mark)u
1 mark: +$60 m (from 30 + 30) Must be positive
ii) the change in money supply is? (1 mark)
1 mark: = +750 m from something like 60/0.08 (dont worry about sign if mark lost in i)

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

5.

Monetary and GDP Equilibrium: Linear Equations (10 marks)

Suppose that the following equations describe Money Demand, Marginal Efficiency of
Investment (MEI), and Aggregate Expenditure for an economy. Magnitudes are in
$billion except for r which is the real interest rate in decimal form.
Money Demand:
Md = 0.15Y 1600r
Aggregate Expenditure: AE = 595 + I + 0.6Y

MEI: I = 233 2,400r

a)i) What is the equilibrium interest rate if Money Supply = 198 and Y = 1,800? (2 marks)
1 mark: set up of the equation 198 = 0.15(1,800) 1600r
1 mark: = 0.045 (4.5%) from some work like the above equation.
ii) What is equilibrium Investment as a function of the interest rate? (1 mark)
1 mark: = 233 2,400(0.045) = 125
iii) Show that Y = 1,800 is equilibrium Income. (1 mark)
1 mark: Y = 1,800 from Y (=AE) = (595 + 125)/(1 0.6) or something comparable
b) Suppose that the economy is at the above equilibrium with Y = 1,800 at a Money
Supply still equal to 198 and r and I as you calculated for this equilibrium. What is
equilibrium Y, r, and I given an increase in Government Spending of +32 (G = +32)?
Ignore the effect of crowding out on Aggregate Expenditure. (3 marks)
1 mark: Y = 1,880 from Y = (595 + 125 + 32)/(1 0.06) or
1 mark: r = 0.0525 (5.25%) from something like r = (0.15*1,880 198)/1600
1 mark: I = 107 from something like 233 2,400(0.0525)
c)i) Ignore part a) and b). The economy still has the equations Md = 0.15Y 1600r and
I = 233 2,400r but AE = 679 + I + 0.6Y (Note 679). The economy is in equilibrium.
We do not know Money Supply but Investment is 89. What is Income? (1 mark)
1 mark: Y = 1,920 from something like (679 + 89)/(1 0.6)
ii) What is the interest rate if Investment is 89? (1 mark)
1 mark: r = 0.06 from something like 89 = 233 2,400r
iii) What is Money Supply if Investment is 89 assuming equilibrium? (1 mark)
1 mark: = 192 from something like Ms = 0.15(1920) 1600(0.06)
Since the economy is in equilibrium, they should get the same answers even if they calculate
from different equations.

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

6.

Spending and Money Equilibrium: Decrease in Government Spending (10 marks)

Suppose that government fears inflation because the economy is growing too quickly.
Economists suggest that the best way to slowdown the economy is a decrease in
government spending. Use our money, investment, and income equilibrium diagrams
to explain their position. The following instructions will help you through this process.
a) Draw income, money, and investment diagrams to show an initial equilibrium before
the decrease in government spending. Use the subscript o for initial curves and
equilibria. (3 marks)
b) Show the effect of the decrease in government spending on equilibrium GDP, the
interest rate, and investment using the subscript 1. (4 marks)
c) Now show the equilibrium GDP that ensues due to the impact on investment of the
decrease in government spending. Use the subscript 2. (3 marks).
AEo

AE

AE2
AE1

Y1 Y2 Yo Y/GDP

So

ro
r1

MEI
Do
D1
Io

M/P

I1

1 mark: ro at intersection of vertical M and negatively sloped Do

1 mark: Io from negatively sloped MEI at ro
1 mark: Yo from intersection of AEo and 45 degree line
1 mark: shift down of AE to AE1 to give Y1 < Yo at intersection of AE1 and 45 degree line
1 mark: shift down (left) of money demand
1 mark: decrease in r to r1 at intersection of Md1 and Ms
1 mark: increase in investment to I1 from MEI at r1
1 mark: shift up of AE from AE1 to AE2
1 mark: AE2 must fall between AEo and AE1
1 mark: equilibrium Y2 > Y1 but less than Yo
TAKE 2 MARKS OFF IF THEY INCREASE RATHER THAN DECREASE G BUT THEN
MARK FOR CONSISTENCY SUBSEQUENT TO THAT MISTAKE, I.E., GIVE THEM
A MARK IF THEY DECREASE I BECAUSE THEY INCREASED G

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

7.

Aggregate Demand/Supply: Diagrammatic (10 marks)

Suppose that the Canadian economy is at long-run price and GDP (Y) equilibrium.
Show the effect of an increase in government spending on Aggregate Expenditure,
equilibrium real GDP, and the equilibrium Price level by using Aggregate
Expenditure/GDP and Aggregate Demand/Supply diagrams. The following subsections
help you do this.
a) Draw an Aggregate Expenditure/Income diagram and Aggregate Demand/Supply
diagram to show the initial equilibrium Price (Po) and real GDP (Yo) if the economy is
presently at potential GDP (Y*). Be sure to draw both the Long-run (LRAS) and
Short-run Aggregate Supply (SRAS) curves. Use the subscipt o for all curves and
equilibria. (3 marks)
b) Now show in your AE/Y diagram and on your AD/AS diagram the new short-run
equilibrium Price (Ps) and GDP (Ys) that results from the increase in government
spending. Make sure that the AE/Y diagram equilibrium accords with the AD/AS
equilibrium Ys. Use the subscipt s for all resultant curves and equilibria. (4 marks)
c) What brings about short-run equilibrium in the AE/Y diagram? (1 mark)
1 mark: AE shifts down (between initial and increase in G AE) due to increase in prices.
NOTE THIS MARK!
c) Now show the long-run equilibrium Price and real GDP. Use the subscript 1 for all
changed curves and equilibria. (2 marks)
AE1
AE1
AEo

real AE

Yo
LRAS

real Y
SRAS1
SRASo

P1
Ps
Po

ADo
Y*Ys
Y1

ADs
real Y

1 mark: vertical LRAS in AD/AS diagram at Yo (or Y*) from intersection of positively sloped
AEo and 45 degree line
1 mark: positively sloped SRAS intersecting ADo at Yo (and Po)
1 mark: Po and Yo at intersection of downward sloping AD and SRAS
1 mark: shift up of AE to intersect 450 line at LRAS (dont worry what they call it)
1 mark: AD shifts to the right
1 mark: AD shifts to the right to pass through Po and Y*
1 mark: equilibrium Ps > Po & Ys > Yo but < Y* (LRAS) from intersection of ADs and SRAS
1 mark: P1 from wherever ADs intersect LRAS (Y*)(doesnt have to be at Po)
1 mark: SRAS shifts to intersect AD where AD intersects LRAS (i.e., at P 1)

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

8.

Aggregate Expenditure/GDP and Aggregate Demand/Supply (10 marks)

Suppose that Aggregate Expenditure, Aggregate Demand, and Short Run Aggregate
Supply in an economy are described by the following equations.
AE = 1,800 + 0.75Y 5P

Y = 7,200 20P

Y = 1,950 + 30P

a) What is the Price level and real GDP at short-run equilibrium in this economy? (3
marks)
1 mark: recognition that 7,200 20P = 1,950 + 30P
1 mark: P = 105 from 7,200 20P = 1,950 + 30P
1 mark: Y = 5,100 from either 7,200 20(105) or Y = 1,950 + 30 (105) = 3,750
b) Suppose that long-run equilibrium occurs at P = 100. What is long-run equilibrium
real GDP? (1 mark)
1 mark: Y = 5,200 from Y = 7,200 20P
c) What is Nominal GDP in long-run equilibrium given that long-run equilibrium occurs
at P = 100? (1 mark)
1 mark: nominal Y = 5,200*100 from 520,000 or consistent with their answer to b)
d)What is Aggregate Demand if an international recession causes Exports to decrease by
100 (X = -100)? (1 mark)
1 mark: Y = 6,800 20P from something like Y = (1,800 100 20P)/(1 0.75) or Y = 7,200
4*100 20P.
e) Suppose that SRAS is still Y = 1,950 30P. What is the new Price and GDP at shortrun equilibrium given the decrease in Exports by 100 (X = -100)? (2 marks)
1 mark: P = 97 with work such as 6,800 20P = 1,950 + 30P
1 mark: Y = 4,860 from either 6,800 20(97) or Y = 1,950 + 30 (97)
(Must be correct; no continuation marks if AD is incorrect from b))
f) Ignore the change in exports in c) and d). What is long-run equilibrium real GDP and
the price level if Aggregate Demand decreases to Y = 7000 20P due to a fall in
Investment? (2 marks)
1 mark: Y = 5,200 from above
1 mark: P = 90 from 7,000 20P = 5,200

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

9.

Aggregate Demand and Aggregate Supply (10 marks)

a) Assume that an economy is initially in short-run Price (Po) and GDP (Yo) equilibrium
with considerable unemployment due to a recessionary gap. Draw an Aggregate
Demand/Aggregate Supply diagram to show the short-run (Ps, Ys) and long-run (P 1,
Y1) effects of an increase in government spending that would eliminate the recessionary
gap if there was no change in prices. (5 marks)
P level

LRAS

SRASo
SRAS1

Ps
Po
ADs
ADo
Yo Ys Y*

real Y (or GDP)

1 mark: Po and Yo at intersection of AD and SRASo, and vertical LRAS

1 mark: increase AD to intersect LRAS (or Y*) > Yo
1 mark: AD must intersect LRAS (or Y*) at Po so that Ps > Po and Ys > Yo but Ys < Y* from
intersection of SRASo and AD
1 mark: increase SRAS to intersect AD at LRAS (Y*)
1 mark: P1 = Po (i.e., no change in price) and Y1 = Yo
b) Suppose that an economy is initially in short-run and long-run Price (Po) and GDP
(Yo) equilibrium. Draw an Aggregate Demand/Aggregate Supply diagram to show the
short-run (Ps, Ys) and long-run (P1, Y1) effects of a significant technological
improvement. Be sure to shift all necessary curves. (5 marks)
P

LRAS1 SRASo
LRASo
SRAS1
SRAS2

Po
Ps
P1

ADo
AD1
Y* Ys Y*1

1 mark: SRAS shifts to the right

1 mark: Ps < Po and Ys > Yo at SRASs (SRAS1 in my diagram) intersect Ado
1 mark: LRAS shifts right (must be beyond Ys)
1 mark: P1 < Ps and Y1 > Ys at AD intersect LRAS1
1 maark: SRAS shifts down to SRAS1 (SRAS2 in my diagram) to intersect AD at LRAS1

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

10. Exchange Rates (10 marks)
a) Suppose that a country has the following balance of payments data (not including the
change in official reserves)
Merchandise Exports
$320b
Merchandise Imports
$315b
Capital Exports
$ 53b
Capital Imports
$ 55b
Service Exports
$ 40b
Service Imports
$ 35b
Interest and Dividend Payments $ 32b
Interest and Dividend Receipts
$ 26b
i) What is the balance on current account? (1 mark)
1 mark = +4 from something like +320 315 + 40 35 + 26 32
ii) What is the private balance of payments (i.e., ignoring change in official reserves)?
1 mark: = +6 from +4 + 55 53
The following diagrams represent the original equilibrium position in the exchange
market for the Canadian dollars: quantity is $C and price is the $US price of $C (e.g.,
$1C = $0.80US). Show the shift in the demand and/or supply of Canadian dollars and
the new equilibrium exchange rate under the following circumstances, each considered
separately. Assume that the exchange rate is flexible unless otherwise advised.
a) A decrease in Canadian exports and increase in
Canadian imports. (2 marks)
EUS/C

1 mark: Demand falls (shifts left)

1 mark: Supply increases (shifts right)

S$C

Eo

D$C

$Co

b) An increase in U.S prices relative to Canadian

prices (2 marks)
1 mark: Demand increases (shifts right)
1 mark: Supply decreases (shifts left)

EUS/C

Q$C
S$C

Eo

D$C

$Co

c) An increase in the U.S. interest rate. (2 marks)

1 mark: Demand decreases (shifts left)
1 mark: Supply increases (shifts right)

EUS/C

Q$C
S$C

Eo

D$C

$Co

d)

Q$C

Suppose that the Canadian exchange rate was fixed, not flexible, in part c). Show on
your diagram in c) what the Bank of Canada must do to maintain the fixed exchange
rate at Eo given the increase in the U.S. interest rate. (2 marks)
1 mark: show Qs from new S and Qd from new D at Eo in diagram for C
1 mark: write that the BofC buys surplus $C (or sells $US).

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

PART II: MULTIPLE CHOICE: Circle the best answer for each question.
Each question is worth 1 mark. No marks deducted for wrong answers.
1.

Which of the following is false for Canadian employment data in the March, 2007?
a) the unemployment rate didnt change because participation rose with employment
b) the unemployment rate didnt change because there was little growth in employment
c) Canadian employment grew proportionally more than U.S. employment
d) Canadian employment growth in the first quarter of 2007 was very good
e) the 2007 unemployment rate is below the natural rate of unemployment in 2000
f) none of the above
Questions 2 and 3 refer to the table below that gives the average households
consumption of electricity and natural gas in 1996 and 2006. 1996 is the base year.
1996
2006
Price/unit
Quantity
Price/unit
Quantity
Electricity (KWs)
0.06
1500
0.08
2400
Natural Gas (CF)
0.15
2000
0.3
1200

2.

What is the Consumer Price Index for 2006 (to the nearest decimal)?
A) 86.5
B) 95.2
C) 100
D) 125.8
E) 137.6
F) 141.5
G) 170.4
H) 184.6
I) none of the above
CPI = 184.6 from 100*0.06*2000 + 0.3*1500/0.06*1500 + 0.15*2000
3.

What is the GDP Deflator index for these goods for 2006 (to the nearest decimal)?
A) 86.5
B) 95.2
C) 100
D) 125.8
E) 137.6
F) 141.5
G) 170.4
H) 184.6
I) none of the above
GDP Deflator = (0.08*2400 + 0.3*1200)/( 0.06*2400 + 0.15*1200) *100 = 170.4
4.

What is the net present value of a return of $5,000 at the end of two years and $8,000
at the end of 3 years if the interest rate is 4%?
a) $10,462.54
b) $10,768.24
c) $11, 526.68
d) $11,734.75
e) $11,919.66
f) $12,204.14
g) $12,019.23
h) none of the above

5.

Which of the following combinations of Aggregate Demand (AD) and Short-run

Aggregate Supply (SRAS) might be an economic reason for the war in Iraq?
a) decrease in AD and decrease in SRAS through decrease in the price of oil
b) decrease in AD and decrease in SRAS through increase in the price of oil
c) decrease in AD and increase in SRAS through decrease in the price of oil
d) decrease in AD and increase in SRAS through increase in the price of oil
e) increase in AD and decrease in SRAS through decrease in the price of oil
f) increase in AD and decrease in SRAS through increase in the price of oil
g) increase in AD and increase in SRAS through decrease in the price of oil
h) increase in AD and increase in SRAS through increase in the price of oil
i) none of the above

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

6.

Which of the following is likely to happen if employment data in the next few months
shows the U.S. economy growing rapidly? The Federal Reserve will likely
a) increase interest rates to prevent inflation, causing bond prices to fall
b) increase interest rates to prevent inflation, causing bond prices to rise
c) do nothing since the economy is moving well on its own
d) decrease interest rates to prevent inflation, causing bond prices to fall
e) decrease interest rates to prevent inflation, causing bond prices to rise
f) none of the above

7.

Which of the following would increase the effectiveness of government spending as a

stimulus to economic growth?
a) more inelastic Demand for Money
b) a higher tax rate
c) more inelastic Marginal Efficiency of Investment d) a higher savings rate (MPS)
e) none of the above

8.

Which of the following policy combinations could possibly (depending on their

magnitures) increase equilibrium GDP without changing the equilibrium interest rate?
a) increase Government Spending and decrease Taxes
b) increase Government Spending and decrease Transfer Payments
c) increase Government Spending and decrease Money Supply
d) increase Money Supply and decrease Government Spending
e) increase Money Supply and decrease Taxes
f) increase Money Supply and decrease Transfer Payments
g) none of the above

9.

An economy is initially in short-run equilibrium (Ps and Ys) above potential GDP (Y*).
Which of the following is the long-run equilibrium effect on equilibrium Income (Y),
the price level (P), and wages (W) relative to this short-run if the market is allowed to
correct itself without government intervention? ( = increase, = decrease)
a) Y, P, W
b) Y, P, W
c) Y, P, Wd) Y, P, W
e) Y, P, W
f) Y, P, W g) Y, P, W
h) Y, P, W
i) none of the above

10. Suppose that an economy is presently at potental (full employment) income. What is
short-run and long-run equilibrium effect (relative to initial equilibrium) on the Price
level (P) and real GDP (Y) of a significant decrease in the price of oil?
a) decrease in P and Y in the short-run and decrease in Y in the long-run
b) decrease in P and Y in the short-run and no change in Y in the long-run
c) decrease in P and increase in Y in the short-run and decrease in Y in the long-run
d) decrease in P and increase in Y in the short-run and no change in Y in the long-run
e) increase in P and decrease in Y in the short-run and decrease in Y in the long-run
f) increase in P and decrease in Y in the short-run and no change in Y in the long-run
g) increase in P and increase in Y in the short-run and decrease in Y in the longh) increase in P and increase in Y in the short-run and no change in Y in the long-run
i) none of the above

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