General Business 765, Lecture 4 Student Name: ________________
Spring 2000 ID
Number: ___________________
Second Midterm
Wednesday, April 5, 2000
DO NOT BEGIN WORKING
UNTIL THE INSTRUCTOR
TELLS YOU TO DO SO.
READ THESE
INSTRUCTIONS FIRST.
You have 90 minutes to complete the exam (we will not extend
the hour this time: no exceptions),
which consists of two parts: Part I which is multiple choice questions
and Part II which is short answer/essay questions. Each multiple choice question is worth three points and the
weight of each problem/essay question is indicated. The exam has ----
pages.
- CHOOSE
THE BEST ANSWER FROM THE FIVE ALTERNATIVES GIVEN ON THE MULTIPLE CHOICE
SECTION OF THE EXAM.
- PLEASE
USE STANDARD ENGLISH AND COMPLETE SENTENCES ON THE SHORT ESSAY.
- MAKE
SURE YOU SHOW YOUR WORK.
- NUMERICAL
ANSWERS WITHOUT SUPPORTING WORK WILL NOT RECEIVE FULL CREDIT.
Stop, take a breath, and think carefully before you answer
any questions. There are no intentional
“tricks”. Good luck.
Part I: Multiple
Choice Questions
Use the following simple Keynesian model to answer the next
two questions.
C = 300 +
0.9 (Y - T)
I = 500
G = 300
T = 400
Where C is household consumption expenditure, I is
investment expenditure, G is government
expenditure, and T is taxes.
- The
equilibrium level of consumption is
- 7400
- 6600
- 5400
- 6960
- 6000
- Given
the above information, suppose the government changes its tax policy into
a proportional tax (i.e., now the tax collected is based on income level). We observe that under the new tax
policy, an increase of $100 million of government purchases of final goods
and services causes the equilibrium GDP to increase by $217 million. The marginal tax rate is approximately
- 40%
- 44%
- 54%
- 30%
- 46%
- Which
of the following statements is TRUE?
- In
the Classical Model, a tax cut will increase the consumption of
households so real GDP will increase.
- In
the Classical Model, an increase in the money supply will drive the price
level up so that real GDP will increase.
- In
the Keynesian Model, an increase in government expenditure will crowd out
private spending so real GDP will stay unchanged.
- In
the Keynesian Model, a decrease in taxes of $10 generates a smaller effect on real GDP than does
an increase in government spending of $10.
- In
the Keynesian Model, an increase in the money supply will drive the
interest rate down so real GDP will decrease.
Consider the following Keynesian Model to answer the next
two questions.
C = 200 +
0.5(Y – T)
I = 200
G = 300
T = 200 +
0.2Y
- What
is the output that makes saving equal to zero?
- 1000
- 750
- 600
- 500
- 400
- Suppose
the government decides to increase its spending from 300 to 600. At the new equilibrium, which of the
following is TRUE? The government
is running a
- Budget
surplus of 100.
- Budget
surplus of 550.
- Budget
deficit of 100.
- Budget
deficit of 650.
- Balanced
budget.
- Under
the Classical Model, which of the following statements is FALSE:
- All
markets clear.
- Employment
and real output are dependent on the money supply.
- Prices
are flexible.
- The
desired ratio of money held to income is not affected by prices or real
output.
- In
the long run, demand management policy is both ineffective and
unnecessary.
- Suppose
that the aggregate expenditure is given by the following formula:
AE = C + I + G + (X – M)
In this setting, I is defined as
spending on:
A.
Private investment and government investment.
B.
New home construction and purchases of plant and equipment.
C.
New home construction and purchases of plant and equipment,
plus unintended inventory changes.
D.
New home construction and purchases of plant and equipment,
minus unintended inventory changes.
E.
Private investment and government investment, less unintended
inventory changes.
- In the
Classical long-run Model, which of the following policies will cause the
full employment level of output to increase?
- The
government increases transfers for unemployed workers.
- The
government raises corporate profit taxes.
- The
government cuts subsidies for education and training programs for
unemployed workers.
- The
government cuts income tax rates.
- The
government increases income tax rates.
- Which
of the following is FALSE?
- At
full employment there is no frictional unemployment.
- Leakages
equal injections in equilibrium.
- The
CPI index in the base year is always 100 (or 1).
- The
tax multiplier is always negative.
- If
the economy operates at full employment, then the point at which it
operates will be on the production possibility frontier.
- The
tendency for increases in government spending to cause reductions in private
investment and consumption is called
- Expansionary
fiscal policy.
- Inflationary
monetary policy.
- The
crowding out effect.
- Demand
management policy.
- Market
clearing condition.
- Economic
growth is best defined as
- The
rate of growth of employment.
- The
long-run increase in total output.
- The
rate of increase in economic productivity.
- The
cyclical changes in total output.
- The
rate of growth of the price level.
- When
the economy is in equilibrium, the Keynesian model predicts that
- There
will be no unplanned changes in inventory.
- Planned
savings equal zero.
- There
is no unemployment.
- Any
change in spending will have no effect on output.
- The
price level will move in order to restore equilibrium whenever any small
change occurs.
- Which
of the following is TRUE?
- At
any level of employment, labor productivity can be calculated by dividing
total output by total employment.
- Labor
productivity is defined as the Gross Domestic Product divided by the
labor force.
- On a
graph that has on the horizontal axis employment and on the vertical axis
real output, labor productivity for a particular level of output equals
the slope of a line from the origin to a point on the production function
that represents that level of output.
- A
and C
- A, B
and C
- Which
of the following statements is TRUE?
- In
the Classical Model economic booms or recessions occur because the labor
market is not in equilibrium.
- The
Keynesian Model explains the occurrence of booms and recessions as the
natural outcome of a spending shock in the economy.
- Increases
in capital, holding everything else constant, will increase labor
productivity.
- A,
B, and C are true.
- B
and C are true.
- In the
loanable funds market we know that
- The
supply of loanable funds is the level of saving available in financial
markets.
- The
demand for funds is positively related to the interest rate.
- An
increase in government spending, holding everything else constant, will
lead to an increase in saving, a decrease in investment, and no change in
the interest rate.
- A,
B, and C are true.
- A
and B are true.
- An
increase in labor demand, holding everything else constant, will
- Cause
real wages to increase.
- Decrease
labor productivity for the economy.
- Shift
the aggregate production function upwards and to the left as firms hire
more units of labor.
- A,
B, and C are true.
- A
and B are true.
- According
to the Classical Model an increase in the money supply of 20% will
- Have
no impact on the economy since output is always at the full employment
level of output in the Classical Model.
- Result
in a 20% increase in the price level.
- Result
in a 20% increase in real output.
- Result
in a 20% increase in both the price level and real output.
- Cause
people to want to hold more money and as households reduce their spending
in the aggregate we will see the price level decrease in the economy.
- The
marginal propensity to consume
- Is
the slope of the consumption function.
- Is
the ratio of the change in consumption to the change in disposable
income.
- Is
the reciprocal of the marginal propensity to save.
- Tells
us how much consumption changes by when disposable income increases by
one dollar.
- A,
B, and D are true statements.
- Suppose
the government decides that running a deficit is not a good thing for the
economy. In the budget for the
coming year, the government decides to reduce the size of the deficit
(with hopes of eventually eliminating the yearly deficit). A reduction in the size of the deficit
(holding everything else constant) will
- Cause
real interest rates to fall.
- Lead
to increases in investment and decreases in consumption.
- Have
no impact on the loanable funds market.
- Lead
to increases in saving.
- Crowd
out investment.
- In the
Classical Model, demand management policies are
- Generally
effective in the short run.
- Effective
at stimulating the economy through increases in government spending and
money supply adjustments.
- Ineffective
at stimulating the level of real GDP but may lead to inflationary
pressures in the economy.
- Not
possible since the model does not allow the level of government spending
or the level of the money supply to vary.
- A
and B are true.
Part II: Short Essay
Questions
Below are four different baskets of items. Choose two baskets and write a short essay
about each basket utilizing each term in the list. Explain how the terms relate to one another. Where appropriate use graphs or examples to
illustrate these relationships. Think
before you write so that your essay indicates organized thought. Be sure to use standard English and complete
sentences. Assume that the grader is a
blank slate waiting to be educated by you:
MAKE NO ASSUMPTIONS ABOUT WHAT THE GRADER KNOWS PRIOR TO READING YOUR
ANSWER. Scores on this question will
depend on clarity of explanation, degree of understanding and knowledge
illustrated, organization of answer, English grammar, and supporting
illustration.
- Marginal
propensity to save
- Consumption
function with respect to income
- Consumption
function with respect to disposable income
Basket 4:
- Economic
growth
- Costs
of economic growth
- Pro-growth
policies
- Why
is economic growth difficult for some countries?
1. (10 points for
this question)
2. (10 points for the question)
3. (10 points total
for the question) Use the following
information to answer the next question.
Autonomous consumption = 100
MPC = .5
T = t0 + .2Y where t0
= autonomous taxes
I = 100
G = 100
(X – M) = 5
A.
(1 point) The
equilibrium level of output for this economy is _____________
B.
(1 point) Consumption
when this economy is in equilibrium equals _________________
C.
(1 point) Saving when
this economy is in equilibrium equals ___________
D.
(1 point) Taxes when
this economy is in equilibrium equals ____________
E.
(1 point) The tax
expenditure multiplier for this economy equals ____________
F.
(1 point) The
multiplier for this economy equals _____________
G.
(2 points) Suppose the
full employment output for this economy is $800. In order to reach this full employment level of output government
spending would need to change by
_________________________________________________________ (be sure to indicate
the direction of change).
H.
(2 points) Suppose
instead of changing government spending, this level of full employment output
was reached by changing autonomous taxes.
Autonomous taxes would need to change by
_________________________________________________in order for this economy to
reach the full employment level of output.
(Be sure in your answer you indicate the direction of change.)
I.