Economics 102 Name: .
Professor
Kelly ID #: .
Midterm # 2 Discussion
Section #:
.
April 17, 2000 TA Name: .
Version 1
DO
NOT BEGIN WORKING
UNTIL
THE INSTRUCTOR TELLS YOU TO DO SO.
READ
THESE INSTRUCTIONS FIRST
You have 90
minutes to complete the exam, which consists of 28 multiple choice questions.
All questions are worth 3.5 points each for a total of 98 points. If you write your name, ID#, Section #, and
version number on the scantron sheet, you will get an extra 2 points. The whole exam is worth 100 points.
Please answer all questions on the scantron
sheet with a #2 pencil. Choose the best answer from the five
alternatives offered. Be sure to fill in the coding sheet carefully and
accurately.
How to fill in the coding sheet
:
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name, first name and middle initial in the spaces marked
“Last Name”, “First Name”, and “MI”. Fill in the corresponding bubbles below.
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ID number in the spaces marked “Identification Number”. Fill in the
bubbles.
3. Write your discussion section number under “Special Codes” spaces ABC, and fill in the bubbles.
4. Under “Special Codes” spaces D, fill in the bubble corresponding to
the “version number” at the
top of this page.
Discussion sections are as follows :
|
Andrei
Shinkevich |
326 2:25 W |
|
Camilo
Tovar |
321 9:55 W |
|
Jaeho
Cheung |
322 11:00 W |
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327 3:30 W |
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323 9:55 F |
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324 12:05 W |
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|
329 11:00 F |
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325 1:20 W |
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331 11:00 R |
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332 12:05 F |
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328 8:50 R |
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334 12:05 R |
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335 1:20 R |
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330 9:55 R |
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If you have
any questions during the exam, please remain seated and raise your hand.
When you are
finished, please get up quietly and bring your code sheet and this exam booklet
to the place indicated by the instructors.
Think carefully before you answer any
questions. There are no intentional “tricks”; nor are all of the answers
intended to be obvious. Choose the best
answer from the five alternatives offered. Good luck!
******
VERSION #1 ******
Please
answer all questions on the scantron sheet with a #2 pencil. Choose the best answer from the five alternatives
offered. Be sure to fill in the coding
sheet carefully and accurately.
1.
According
to the classical model government demand for funds is
a)
Positively
related to the interest rate.
b)
Negatively
related to the interest rate.
c)
Not
related to the interest rate.
d)
Positively
related to the price level.
e)
Negatively
related to the price level.
2.
Disposable
income is
a)
Nominal
income.
b)
Average
income of a person after subsidies.
c)
Income
adjusted for inflation.
d)
Income
after taxes.
e)
The
income remaining after bills have been paid.
3.
Consider
the following table of a Keynesian economy.
|
Output |
Consumption |
Saving |
Disposable
Income |
Taxes |
|
1100 |
800 |
|
|
100 |
|
|
950 |
|
|
100 |
|
1400 |
|
275 |
|
100 |
Assuming
the consumption function is linear, the marginal propensity to consume (MPC) is
and autonomous consumption is .
a)
MPC
= 0.75, and Autonomous consumption = -25.
b)
MPC
= 0.8, and Autonomous consumption = 25.
c)
MPC
= 0.75, and Autonomous consumption = 25.
d)
MPC
= 0.8, and Autonomous consumption = 50.
e)
MPC
= 0.75, and Autonomous consumption = 50.
4. Suppose
you are working with a simple Keynesian model with no foreign sector, a
marginal propensity to consume of 0.75 and fixed taxes of $2,000. If government increases both taxes and
government spending by $1,000 at the same time, by how much will consumption
increase or decrease?
a)
Consumption
will increase by $1,000.
b)
Consumption
will increase by $2,250.
c)
Consumption
will not change.
d)
Consumption
will decrease by $750.
e)
Consumption
will decrease by $1,000.
5.
Which
of the following statements is FALSE?
a) An increase in capital, holding everything else constant, will result in an increase in labor productivity.
b) An increase in government spending, holding everything else constant, will result in crowding out in the classical model because interest rates increase.
c) An increase in the money supply, holding everything else constant, has no impact on real GDP in the classical model.
d) An increase in the interest rate, holding everything else constant, will cause a shift out of the supply of funds curve.
e) An increase in the money supply, holding everything else constant, will lead to an increase in the price level in the classical model.
6.
Suppose
the assumptions of the classical model hold. Suppose also that there are no firms,
only the government and households. What would be the result if for some reason
the supply of savings at every interest rate suddenly fell? Assume that the government is running a
deficit.
a)
Interest
rates would rise and the level of savings would not change.
b)
Interest
rates would fall and the level of savings would fall.
c)
Interest
rates would fall and the level of savings would not change.
d)
Interest
rates would rise and the level of savings would fall.
e)
Interest
rates would not change and the level of savings would fall.
7.
Assume
the assumptions of the classical model hold. If there is an increase in
employment and the capital stock remains constant, what will happen to labor
productivity and output?
a)
Labor
productivity will decrease, but output will increase.
b)
Both
labor productivity and output will decrease.
c)
Labor
productivity will increase, but output will decrease.
d)
Both
labor productivity and output will increase.
e)
Labor
productivity will decrease and output does not change.
8.
In
the classical model, which of the following statements is TRUE?
a)
The
total supply of funds is negatively related to the interest rate.
b)
An
increase in government spending will not change total spending.
c)
Government
demand for funds is negatively related to the interest rate.
d)
The
desired ratio of money to income (k) changes as the money supply changes.
e)
S=I+G,
where S is the supply of funds, G is government purchases.
9.
According
to the Wall Street Journal, PepBoys stock has a current annual dividend of
$4.80 per share. Suppose that investors
require an expected 12% annual return as compensation for holding PepBoys
stock, given its perceived risk. If
future dividends per year for PepBoys stock are expected to be $4.80 forever,
what price would investor’s pay for the stock?
a)
$0.4
b)
$4.
c)
$4.80
d)
$40
e)
$57.6
10.
In
the classical, long-run view, if government increases the money supply by 20%,
a)
the
price level will increase by 20%.
b)
the
price level and output will both increase by 20%.
c)
the
price level, output, and employment will all increase by 20%.
d)
the
price level will fall by 20%.
e)
there
will be no impact on the price level, output or employment.
11.
Which
of the following statements is TRUE?
a)
In
the classical model, real wages are completely flexible.
b)
In
the Keynesian model, nominal wages will adjust to correct any disequilibrium in
the labor market.
c)
In
the classical model, any disequilibrium in the loanable funds market will be
eliminated through interest rate adjustment.
d) a) and c).
e)
a),
b) and c).
Use the information below to answer the next two
questions.
The information below describes a Keynesian
model with no foreign sector.
a = 600 where,
a = autonomous consumption
b = 0.75 b = MPC
T = 400
I = 600
G =
900
12.
What
is the equilibrium level of GDP?
a) 6,800
b) 7,200
c) 7,400
d) 6,500
e) 7,800
13.
Suppose
you want to increase the level of output by $200. Which of the following
policies will achieve this result:
a) An
increase in government purchases by 50.
b) A
decrease in taxes by 50.
c) An
increase of both government purchases and taxes by 200.
d) Any
of the policies described in a), b) or c).
e) Polices
a) or c).
14.
The
classical dichotomy would imply that;
a) Say’s
law.
b) Demand
policies are ineffective.
c) Private
investment is crowded out.
d) Monetary
policy has no effect on real variables.
e) Demand
policies induce changes in total output.
Use the information below to answer the next two
questions.
The equations below describe a Keynesian model
with no foreign sector.
AE = C + I + G
C = 40 + 0.8DI
I = 100
G = 400
T = 50 + 0.25Y
15.
What
is the aggregate expenditure as a function of income?
a) 500 + 0.4Y
b) 580 + 0.6Y
c) 500 + 0.6Y
d) 580 + Y
e) 500 + Y
16.
When
this economy is in equilibrium, can the government’s budget be balanced?
a)
No,
the government runs a deficit of $ 87.50.
b)
No,
the government runs a deficit of $ 37.50.
c)
Yes,
the government runs a balanced budget.
d)
No,
the government runs a surplus of $ 225.
e)
No,
the government runs a surplus of $ 205.
17.
Which
of the following statements is TRUE?
a) An
automatic stabilizer is one that automatically balances the budget.
b) According
to Say’s law all demand creates its own supply.
c) The
aggregate expenditure (AE) line for an economy with an income tax has a steeper
slope than the aggregate expenditure (AE) line for an economy with constant
taxes, holding everything else constant.
d) Automatic
stabilizers diminish the impact of changes in spending on the equilibrium level
of income.
e) If
G and T rise by equal amounts, the government gives to the public with one hand
and takes away an equal amount with the other.
Therefore, the effects on GDP cancel out and there is no change in GDP.
Use
the information below to answer the next two questions.
The equations below describe a Keynesian model.
C =
100 + 0.5(Y-T)
I = 200
X =
100
M =
150
18.
What
is Disposable income when this economy is in equilibrium?
a)
300
b)
500
c)
800
d)
1000
e)
1200
19.
The
saving function for this economy is
a)
S
= -150 + 0.25(Y-T)
b)
S
= -100 + 0.25Y
c)
S
= -150 + 0.5(Y-T)
d)
S
= -50 + 0.75Y
e)
S
= -100 + 0.5(Y-T)
20.
Assume
that the government is considering plans to increase output in order to reduce
unemployment in a Keynesian economy. Which of the following would be effective?
a)
Decrease
government spending
b)
Decrease
taxes
c)
Increase
taxes
d)
Decrease
government spending and increase taxes at the same time
e)
All
of the above
21.
In
the Keynesian model, if output is greater than total spending, which of the
following statements is TRUE?
I. Inventories will fall.
II.
Inventories will rise.
III.
Total output will decrease.
IV. Total output will increase.
a)
I
only.
b)
II
only.
c)
I
and III.
d)
I
and IV.
e)
II
and III.
22.
Which
of the following statements is TRUE?
a)
In
the classical model prices in each market adjust until the quantity demanded
equals the quantity supplied in each market.
b)
The
Keynesian model explains why over a long enough period of time the overall
economy tends to be at full employment.
c)
The
classical model focuses primarily on nominal values.
d)
In
the classical model leakages from the income-expenditure stream include taxes,
saving, and exports.
e)
In
the classical model injections into the income-expenditure stream include
consumption, investment, and government spending.
23.
Consider
the following Keynesian economy:
|
Y |
C |
S |
I |
G |
T |
X |
M |
AE |
|
800 |
500 |
|
100 |
50 |
100 |
|
50 |
750 |
In
this economy, injections are , and leakages are .
a)
200,
250
b)
250,
250
c)
300,
350
d)
500,
750
e)
800,
750
24.
Consider
that a Keynesian three sector model without a foreign sector where taxes are
autonomous and constant. Which of the following is TRUE?
a)
It
is always true that the government cannot reach the full employment level of
output in a Keynesian economy.
b)
It
is always true that S + T = I + G.
c)
If
government decreases both T and G by the same amount at the same time, GDP will
increase.
d)
The
absolute value of the tax multiplier is greater than the absolute value of the
government expenditure multiplier.
e)
In
equilibrium, if the government keeps a balanced budget, it is always true that
S = I.
25.
Suppose
Mrs. Diamond has a linear consumption function. Taxes are 20% of her gross
income. When her disposable income is $10,000, she spends all of her disposable
income. When her gross income equals $22,500, she saves $2,000. What is her consumption at the gross income
level of $40,000?
a)
25,000
b)
26,500
c)
27,000
d)
28,500
e)
30,000
26.
The
basic idea behind the multiplier is that
a)
an
increase in spending will bring about an even larger increase in equilibrium
GDP.
b)
an
increase in GDP brings about another larger increase in GDP.
c)
an
increase in consumer spending brings about an even larger change in investment.
d)
an
increase in investment brings about an even larger increase in the capital
stock.
e)
an
increase in government spending brings about an even larger increase in
exports.
27.
Suppose
the loanable funds market is initially in equilibrium. Furthermore, suppose the government is
operating with a balanced budget and that the interest rate is equal to 3% and
the equilibrium amount of funds is equal to $3 billion. Suppose the government
decides to increase its purchases by $1 billion, while maintaining the given
level of taxes. This change results in
interest rates increasing to 5%.
a) The
level of savings in the final equilibrium is greater than $5 billion.
b) The
final level of investment will be less than $3 billion.
c) Savings
and investment will increase by $0.5 billion.
d) The
decrease in investment will be greater than $1 billion.
e) Consumption
will increase by $1 billion.
28.
According
to the classical model, economic growth will occur if
a)
The
labor demand curve shifts to the right, holding everything else constant.
b)
The
equilibrium real wage increases because the supply of labor shifted.
c)
The
stock of capital increases, holding everything else constant.
d)
Answers
a), b) and c) always produce economic growth.
e)
Answers
a) and c) always produce economic growth.