Answer key at the end of the test

I. Multiple Choice (10 questions - 5 points apiece)

Select the best answer to each of the following questions. Place your response to each question in the space provided below. Only answers placed in blanks will receive consideration.

1. ______

2. ______

3. ______

4. ______

5. ______

6. ______

7. ______

8. ______

9. ______

10. ______

1) During the past 30 years the type of federal government outlay which has grown most sharply is:

A. transfer payments.
B. interest on the national debt.
C. payroll taxes for social security.
D. expenditures on national defense.

2) A decrease in the tax rate will cause:

A. a decrease in the multiplier effect.
B. a decrease in aggregate demand.
C. an increase in induced expenditures.
D. an increase in autonomous expenditures.

3) Investment by business firms is higher,

A. the lower the expected sales of the firm and higher the rate of interest.
B. the higher the expected sales of the firm and the higher the rate of interest.
C. the higher the expected sales of the firm and the lower the rate of interest.
D. the lower the expected sales of the firm and the higher the rate of interest.

4) If the real exchange rate between the United States and Ireland falls,

A. Irish residents demand fewer U.S. goods and U.S. residents demand more Irish goods.
B. Irish residents demand more U.S. goods and U.S. residents demand fewer Irish goods.
C. Irish residents demand fewer U.S. services.
D. U.S. residents demand less Irish services.

5) A change in factor prices shifts

A. the Short-run aggregate supply(SAS) and long-run aggregate supply(LAS)curves.
B. the LAS curve but not the SAS curve.
C. the SAS curve but not the LAS curve.
D. neither the SAS nor the LAS curve.

6) An economy that is characterized by very low unemployment and high inflation is likely to be in a

A. a recessionary gap.
B. a full-employment equilibrium.
C. an inflationary gap.
D. a depression.

7) If firms set prices and then keep them fixed for a period of time, their "sticky prices" imply that

A. prices are set by aggregate demand and supply.
B. the aggregate price level adjust continuously.
C. the aggregate price level is sticky and that aggregate supply determines the quantity of goods and services sold.
D. the aggregate price level is sticky and that aggregate demand determines the quantity of goods and services sold.

8) If an increase in a household's disposable income from $10,000 to $15,000 boosts its consumption expenditures from $8,000 to $11,000, the

A. household is dissaving.
B. slope of the consumption function is 0.6.
C. slope of the consumption function is 0.4.
D. marginal propensity to consume over this range is negative.

9) Due to the effect of the multiplier, a one-time change in expenditure will

A. have little secondary effect on income.
B. expand income by an infinite amount.
C. generate more additional income than the change in expenditure.
D. reduce saving and investment activity and future income.

10) If unplanned inventories fall, aggregate planned expenditure is

A. greater than real GDP and firms will raise output.
B. greater than real GDP and firms will lower output.
C. less than real GDP and firms will raise output.
D. less than real GDP and firms will lower output.

II. Problem Solving (25 points)

Provide numerical answers to the following questions, using the chart below. Partial credit will be given if applicable, so you need to show all work involved in your calculations. Please circle your final answer to each question. If you need more room, use the back side of this page.

Answer the following questions, using the information provided below:

1) The value of the mpc.
2) The level of output in equilibrium.
3) The level of the trade balance in equilibrium. Suppose now that government spending rises by $2000. Calculate
4) The CHANGE in equilibrium output.
5) The CHANGE in the government surplus/deficit.

A small open economy has the following characteristics:

- An increase in total income of $1000 causes disposable income to rise by $600.
- Of this amount, $420 is spent on consumption and $180 is saved.
- The $1000 increase in income also leads to $220 in increased imports.
- Autonomous consumption is $4500; autonomous net exports are $12,500.
- Investment expenditures are $15,000; government expenditures are $28,000
 

III. Essay (25 Points)

Answer the following question. Use the back of this sheet if necessary. If you need additional space, see me for an additional sheet.

Explain briefly how and why each of the following would affect aggregate expenditures. The "how" part of your answer should describe the direction of the effect and the component of expenditure affected. The "why" should explain the economic logic of the effect.

1) An increase in the expected future level of output
2) An increase in the expected future level of income
3) An increase in the exchange rate
4) An increase in the real interest rate
5) An increase in the tax rate

Answer key

multiple choice

1. A

2. C

3. C

4. B

5. C

6. C

7. D

8. B

9. C

10. A

Analytical problem

1) mpc =.7

2) q=75,000

3)x=-4000

4)Change in q = 2500

5) -1000

essay

1) I increasing - make more profit in the future if produce more, should invest now

2) if y(expected) increases - then increase consumption now

3) E goes up -AD falls

4) (r-pi) goes up, I decreases, AD decreases

5) tax rate increases, tax payments increase, disposable income decreases, consumption decreases, AD falls