Principles of Macroeconomics Final Exam Practice

Part one: Multiple Choices: Circle the most appropriate answer.

1. According to the laissez-faire strategy: A) The market self-adjusts to full employment. B) Increased government spending is needed to stimulate the economy. C) Government policy has its chief effect through the demand side. D) The aggregate supply curve is horizontal. Answer: A 2. External shocks include all of the following except: A) Population growth. B) Natural disasters. C) Terrorist attacks. D) Wars.

Answer: A

3. Which of the following effects suggests that lower average prices stimulate more borrowing? A) The cost effect. C) The real-balances effect. B) The interest-rate effect. D) The profit effect. Answer: B 4. The aggregate supply curve is upward-sloping because of the: A) The real-balances effect. C) The interest-rate effect. B) The foreign-trade effect. D) The cost effect.

Answer: D

5. If macro equilibrium is at a level below full employment, which of the following best describes the impact of a rightward shift of the aggregate demand curve, ceteris paribus? A) A higher price level and a higher level of output. B) A higher price level and a lower level of output. C) A recession or depression. D) A lower price level and a higher level of output. Answer: A 6. Which of the following is most likely to cause the aggregate demand curve to shift to the left? A) A decrease in taxes. C) A decrease in government spending. B) A decrease in savings. D) All of the above. Answer: C 7. Which of the following forces did Keynes assert had the strongest influence on consumption decisions? A) Prices. B) Wealth. C) Interest rates. D) Disposable income. Answer: D

Principles of Macroeconomics Final Exam Practice

Figure (2) Keynesian aggregate expenditures-output model

a. b. c. d.

8. As shown in Figure (2), equilibrium GDP is: $500 billion. $1,500 billion. $1,000 billion. $2,000 billion. 9. In Figure (2), the value of the multiplier is: A) 0.5 B) 1 C) 2 D) 5 E) 10

Answer: C Answer C

10. Which of the following would shift the consumption function? A) A change in the level of disposable income. C) A change in the level of investment. B) A change in tax policy. D) A change in technology. Answer: B 11. A recessionary gap implies that: A) Aggregate demand is less than aggregate supply at the full-employment price level. B) The unemployment rate is falling. C) Aggregate demand exceeds aggregate supply at the full-employment price level. D) Inventories are being depleted faster than producers desire. Answer: A 12. Calculate the total change in aggregate demand (Y) because of an initial $300 decrease in investment spending (I), given that C = 150 + 0.50YD. A) $300 decrease. B) $150 decrease. C) $1,200 decrease. D) $600 decrease. Answer: D 13. There is a trade-off between unemployment and inflation when the aggregate: A) Supply curve is upward sloping. C) Supply curve is downward sloping. B) Supply curve is vertical. D) Demand curve is downward sloping. Answer: A

Principles of Macroeconomics Final Exam Practice

Use the following to answer questions 14: Figure (3)

P ric e L e v e l

A Q
A

Q
R

e a l

14. Using Figure (3), if full employment occurs at QA then aggregate demand is: A) Just right. C) Too small causing an inflationary gap. B) Too great causing an inflationary gap. D) Too great causing a recessionary gap. Answer: B 15. If leakages are greater than injections, then equilibrium output will be: A) Less than full-employment output and a recessionary gap will occur. B) Less than full-employment output and an inflationary gap will occur. C) More than full-employment output and a recessionary gap will occur. D) More than full-employment output and an inflationary gap will occur. Answer: A 16. Which of the following is true about the Neoclassical and Monetarist views of the economy? A) The aggregate supply curve is vertical in the long run. B) In the long run, there is no trade-off between unemployment and inflation. C) In the long run, a shift in aggregate demand will change the price level but not the level of output. D) All of the above. Answer: D

Principles of Macroeconomics Final Exam Practice

Figure (4) Aggregate Supply and Demand Curves

17. In Figure (4) which of the following is not consistent with a shift in the aggregate demand curve from AD1 to AD2? A). An increase in Taxes. B) An increase in investment. C) An increase in government spending. D) An increase in net exports. Answer: A 18. To eliminate an AD shortfall (Y) of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes (T) by: A) $400 billion. B) $120 billion. C) $30 billion. D) $40 billion. Answer: D 19. Which of the following will provide fiscal stimulus to the economy? A) Decreasing taxes. B) Increasing government spending on goods and services. C) Increasing transfer payments. D) All of the above.

Answer: D

20. Buying a cup of coffee with a dollar bill represents the use of money as a: A) Medium of exchange. B) Unit of account. C) Store of value D) all of the above. Answer: A 21. Maria transfers $1,000 from her checkable deposits account to her savings deposits account. This transaction will A) Decrease both M1 and M2 B) Not change M1 and decrease M2 C) Decrease M1 and not change M2 D) Increase both M1 and M2 E) None of the above Answer: C

Principles of Macroeconomics Final Exam Practice

Use the following to answer question 21: Figure (5)

P R IC E L E V E L

PE

1D

A A Q E R E A

2D

22. A shift from AD1 to AD2 in Figure (5) will: A) Worsen the existing unemployment problem. B) Reduce, but not close, the GDP gap. C) Cause significant inflation. D) Eliminate the GDP gap.

Q F L G

Answer: B

23. Suppose University Bank has zero excess reserves. If the required reserve ratio decreases, the: A) Bank's assets will increase. B) Bank will not have enough required reserves. C) Bank will be able to make more loans. D) Money multiplier will decrease. Answer: C 24. Deposit creation occurs when: A) A bank lends money. B) A person takes money out of one bank and puts it in another bank. C) A bank borrows dollars from the Federal Reserve. D) All of the above.

Answer: A

Principles of Macroeconomics Final Exam Practice

Part Two: True / False Questions: State whether the following statements True or False.
25. In the long run, shifts in the aggregate demand curve affect the price level but not the level of output. Answer: True 26. Saving equals the difference between personal income and consumption. 27. Full employment occurs when zero unemployment is achieved. Answer: False Answer: False

28. The GDP deflator is the only price index based on a fixed market basket of goods and services. Answer: False 29. It is impossible for the APS to be negative. Answer False

30. Consumer saving and business investment are the primary sources of imbalance in a wholly private and closed economy. Answer: True 31. Crowding out is the idea that an increase in government spending may cause a reduction in private-sector spending. Answer: True 32. Equal Credit cards are money because they serve the three functions of money. Answer: False 33. Money creation occurs when banks make loans. 34. Savings accounts at commercial banks are part of M1. Answer: True Answer: False

Principles of Macroeconomics Final Exam Practice

Part Three: Essay and Problem Solving Questions
1. Why is the tax cut fiscal Policy different than the government spending fiscal Policy?

Answer: When the government spends money to buy goods and services in the product market, aggregate demand increases initially by the amount of the government expenditure. Then the multiplier process begins and consumers spend an additional amount equal to the initial expenditure times the MPC. When the government cuts taxes, disposable income increases initially. Consumers spend part of the tax cut and save the other part. Since the MPC is less then one, the initial spending injection is less. As a result a tax cut has less impact than a government spending increase of the same amount. 2. Why is barter less efficient than using money?

Answer: Barter is the direct exchange of one good for another good. In order for a trade to occur, two individuals must want what the other one has to trade. This may not always occur. In addition, some goods are difficult to transport and divide into smaller units. Some goods also spoil easily. Without money, acquiring goods is much more complicated and time consuming. 3. How can an event such as the terrorist attacks in September 2001 affect consumer and business confidence and the economy? Answer: Any situation that makes people feel vulnerable or scared, such as the terrorist attacks, causes 1) a decrease in consumer and business confidence. A decrease in confidence causes individuals to spend less. 2) This causes a decrease in aggregate demand. With less demand for goods and services in the product markets, 3) workers are laid off, incomes decrease and the multiplier process begins.

Principles of Macroeconomics Final Exam Practice

Based on the information of the balance sheet of National Bank, answer questions below.
Table (1) Balance sheet of National Bank Assume

RRR 10%

Assets Liabilities Required reserve $____ Checkable Deposits $100,000 Excess Reserves $____ _____________________________________________________________ Total _________ Total __________ 1.What is the value of the required reserve? $10,000 2.What is the value of the Excess Reserves? $90,000 3.What is the value of the total Assets and Liabilities? $100,000 each one 4.What is the maximum change in money supply National Bank can create from this deposit? $900,000