SO 151
Bremmer
February 14, 1997

3rd In-Class Exam - - Chapters 4-10


Part A. Multiple Choice (3 points each). For each of the following questions, please indicate the best answer in the space provided.
1. If real GDP increased and nominal GDP decreased during the same year, then:
A. inflation occurred during the year.
B. the unemployment rate increased during the year.
C. the general price fell during the year.
D. net exports are negative.
E. All of the above.

2. A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment?
A. the natural rate of unemployment
B. frictional unemployment.
C. structural unemployment.
D. cyclical unemployment.
E. seasonal unemployment.

3. In the Classical model, Say's law implies:
A. the economy will never produce at its full-employment level of output.
B. demand determines real output.
C. markets do not clear.
D. demand creates its own supply.
E. production generates income, which is spent to purchase what was produced.

4. Which of the following is not considered a component of investment in calculating GDP?
A. new residential construction
B. new equipment
C. new factories
D. financial investment in stocks and bonds
E. net increases in inventories

5. Which type of unemployment is most closely connected with the saying "you can't teach an old dog new tricks"?
A. cyclical unemployment
B. structural unemployment
C. seasonal unemployment
D. frictional unemployment
E. voluntary unemployment

6. Inflation means that:
A. all prices are rising, but at different rates.
B. all prices are rising, and at the same rate.
C. the overall price level is rising, although the particular prices of certain goods may be falling.
D. real incomes are rising.
E. None of the above.

7. Keynes pointed out that one reason product markets might not be self-regulating was that:
A. interest rates have a strong influence on saving.
B. households may choose to save rather than spend.
C. business firms may choose to cut output rather than prices when demand falls.
D. labor may insist on pay raises.
E. None of these.

8. At the equilibrium level of income in the Keynesian model, which one of the following statements is not true?
A. Leakages are equal to injections.
B. Planned spending equals actual output.
C. The economy is at full employment.
D. There are no unplanned inventory changes.
E. There is no tendency for the level of output to change.

9. The aggregate expenditure (AE) curve can shift downward for all but which one of the following reasons?
A. an increase in lump sum taxes
B. a decrease in investment
C. an increase in exports
D. an increase in imports
E. a decrease in government spending

10. In the loanable funds market used in the Classical model, if the supply of savings decreases, then, holding everything else constant:
A. interest rates will fall.
B. interest rates will increase.
C. investment will increase.
D. investment will not change.
E. the market will not clear.

11. In the Classical model, the demand for loanable funds by business firms:
A. results from their desire to borrow for investment purposes.
B. is directly related to the interest rate.
C. is inversely related to the interest rate.
D. is inversely related to the supply of loanable funds.
E. Both A and C are true.

12. On a policy level, the classical model and the quantity theory of money argue that in the long run, holding everything else constant, increases in the money supply cause:
A. the output, employment, and price levels to rise.
B. the price level to rise.
C. the price level to fall.
D. the levels of output and employment to fall.
E. the levels of output and employment to rise.

13. Referring to the simple Keynesian macroeconomic model, which of the following will tend to shift the consumption function downward?
A. a decrease in lump sum taxes
B. a decrease in the price level
C. a decrease in wealth
D. a current low level of consumer indebtedness.
E. a decrease in the interest rate

14. In the simple Keynesian model, if output exceeds aggregate expenditures:
A. inventories will decrease, and firms will increase output.
B. inventories will decrease, and firms will decrease output.
C. inventories will increase, and firms will increase output.
D. inventories will increase, and firms will decrease output.
E. there will be no response from firms.

15. The Keynesian investment curve will shift to the right as the result of:
A. the availability of excess capacity.
B. an increase in business taxes.
C. a decrease in the interest rate.
D. an increase in the interest rate.
E. businesses becoming more optimistic with respect to future business conditions.
Part II. Short Answer Questions (55 points). Give a short, concise, but complete answer for each of the following questions. When appropriate, use math, graphs, or equations to explain your answer.

1. Compare and contrasts the Classical model's and the Keynesian model's views about investment and saving. (10 points)

2. Using a Keynesian 45 degree model, show an economy experiencing an inflationary (expansionary) gap. What fiscal policies maybe used to remove the inflationary gap? Explain using your diagram. (10 points)

3. Explain how a larger federal government budget deficit may lead to a larger trade deficit. (10 points)

4. Using the Keynesian 45 degree model, what would happen to employment and income if, in an attempt to lower U.S. unemployment, the federal government increased import barriers? What would happen if all countries did the same? (10 points)

5. Suppose the economy is described by the following equations of the simple Keynesian model:
C = 100 + .8(Y - T)
I0 = 100
G0 = 150
T0 = 100
X0 - M0 = 25.
Using this data, answer the following questions. (15 points)
a. What is the equilibrium level of income?
b. Assume the full-employment level of income is $1,675. What is the necessary change in government expenditure to reach full employment?
c. Instead of changing government expenditures to reach full-employment, a change in lump sum taxes could be advocated? Given your answer in (a), what is the appropriate change in lump sum taxes to reach full-employment income of $1,675?
d. Given your answer in (a), could the economy reach the full-employment income level of $1,675 without changing the size of the government deficit? Explain.