choose the correct option:

1) variable isexogenousif:

a.it is determined outside the model

b.it has no effect on any variables in the model

c.it is determined within the model

d.it causes output to become more volatile

2) The Keynesian income-expenditure model developed in class presumes that:

a.prices are flexible and there is substantial unemployment

b.prices are fixed and there is substantial unemployment

c.prices are flexible and there is very little unemployment

d.prices are fixed and there is very little unemployment

3) Suppose that the marginal tax rate is equal to zero.Consider the balanced budget multiplier described in class. An increase in government spending of $300 billion, matched by an identical increase in taxes, will:

a.cause income to fall

b.cause income to rise by exactly $300 billion

c.have no effect on income

d.cause income to rise but the exact amount cannot be determined

4) Which of the following is the MOST expansionary?

a.there is an open market sale of $100 billion of government debt by the Federal Reserve, taxes are

cut by $100 billion, and government spending rises by $100 billion

b.there is an open market sale of $100 billion of government debt by the Federal Reserve, taxes are

raised by $100 billion, and government spending is cut by $100 billion

c.there is an open market purchase of $100 billion of government debt by the Federal Reserve,taxes

are cut by $100 billion,

and government spending rises by $100 billion

d.there is an open market purchase of $100 billion of government debt by the Federal Reserve, taxes are raised by $100 billion, and government spending is cut by $100 billion

5) Let b denote the marginal propensity to consume.The marginal propensity tosaveis equal to:

a.b

b.1/b

c.1/(1-b)

d.1 - b

6) Suppose that over a ten year period prices double and real GDP is unchanged.It follows that:

a.nominal GDP doubles

b.nominal GDP rises by 50%

c.nominal GDP falls by 50%

d.nominal GDP is unchanged

7) Consider the simple spending multiplier where the marginal tax rate is equal to zero.Assume that the marginal propensity to consume is equal to 0.6.The spending multiplier is equal to:

a.2.5

b.0.4

c.0.6

d.1.67

8) Which of the following is the most expansionary policy mix?

a.a reduction in taxes and an open market purchase of government debt by the Federal Reserve

b.a reduction in taxes and an open market sale of government debt by the Federal Reserve

c.an increase in taxes and an open market sale of government debt by the Federal Reserve

d.an increase in taxes and an open market purchase of government debt by the Federal Reserve

9) Consider the numbers in the following chart.All figures are in billions of dollars. It is presumed that there is no government sector and therefore no taxes or government spending.

YC

400450

600600

800750

1000900

12001050

One the basis of the information we have, we would predict that if Y were zero, then:

a.consumption would be -200

b.consumption would be equal to 150

c.consumption would be zero

d.consumption would be 200

10) Which of the following is the LEAST expansionary?

a.there is an open market purchase of $100 billion of government debt by the Federal Reserve, taxes are raised by $100 billion, and government spending is cut by $100 billion

b.there is an open market sale of $100 billion of government debt by the Federal Reserve, taxes are

raised by $100 billion,and government spending is cut by $100 billion

c.there is an open market sale of $100 billion of government debt by the Federal Reserve, taxes are

cut by $100 billion, and government spending rises by $100 billion

d.there is an open market purchase of $100 billion of government debt by the Federal Reserve,taxes

are cut by $100 billion, and government spending rises by $100 billion

11) Suppose that a company borrows by issuing new bonds.This transaction:

a.is a form of investment as defined in class but it does not contribute towards GDP

b.is not a form of investment as defined in class and it does not contribute towards GDP

c.is not a form of investment as defined in class but it does contribute towards GDP

d.is a form of investment as defined in class and it also contributes towards GDP

12) In the Keynesian model considered in class savings is considered:

a.neither a leakage nor an injection

b.an injection but not a leakage

c.a leakage but not an injection

d.a leakage and an injection

13) Which of the following is a form ofcontractionary fiscalpolicy?

a.a reduction in taxes

b.an open market sale of government debt by the Federal Reserve

c.an open market purchase of government debt by the Federal Reserve

d.an increase in taxes

14) Suppose that the money supply is raised. In the new equilibrium, we can say that:

a.C, I and Y will all be higher

b.I and Y will be higher, but C will be lower

c.I will be higher, but C and Y will be lower

d.I and C will be higher, but Y will be unchanged

15) The paradox of thrift discussed in class implies that an increase in the marginal propensity to save will:

a.have no effect on equilibrium savings

b.lower equilibrium savings

c.raise equilibrium savings

d.cause equilibrium consumption to rise

16) Which of the following serves as anautomatic stabilizer?

a.open market purchases of government debt by the Federal Reserve

b.Social Security

c.Unemployment Insurance

d.defense spending by the government

17) Suppose that the marginal propensity to consume is equal to 0.8 and the marginal tax rate is equal to 0.25.The spending multiplierwith

taxesis equal to:

a.1.25

b.1.67

c.5

d.2.5

18) Suppose that investment is independent of interest rates.This implies that:

a.fiscal policy will be potent because the crowding out effect will be relatively large

b.fiscal policy will be fairly weak because the crowding out effect will be relatively large

c.fiscal policy will be fairly weak because there will be no crowding out

d.fiscal policy will be potent because there will be no crowding out

19) Which of the following policy combinations is themostexpansionary?

a.a reduction in government spending and an increase in taxes

b.a reduction in government spending and a reduction in taxes

c.an increase in both government spending and taxes

d.a reduction in taxes and an increase in government spending

20) Consider the circular flow model considered in class.Which of the following statements is true?

a.I and G are withdrawals

b.I and G are automatic stabilizers

c.I and G are injections

d.I and G are leakages

21) Assume that the marginal propensity to consume is 0.8 and the marginal tax rate is equal to 0.Which of the following is theleast

expansionary?

a. taxes are cut by $400 million

b.government spending is increased by $400 billion

c.government spending is increased by $400 billion and taxes are cut by $150 billion

d.government spending and taxes are both raised by $400 billion

22) Consider the numbers in the following chart.All figures are in billions of dollars. It is presumed that there is no government sector. Sothere is no government spending ortaxes.

YC

400450

600600

800750

1000900

On the basis of this information, we would predict that saving would be 125 if Y were:

a.1200

b.1000

c.1100

d.1300

23) Which of the following flow charts shows thecrowding outeffect from a fiscal expansion?Note that G denotes government spending, Y denotes income,r denotes the interest rate, and I denotes investment.

a.G goes up, this causes Y to rise, this causes money demand to rise, this r to rise, this causes I to rise

b.G goes up, this causes Y to rise, this causes money demand to fall, this causes r to fall, this causes I to fall

c.G goes up, this causes Y to go up, this causes money demandto fall, this causes r to fall, this causes I to rise.

d.G goes up, this causes Y to go up, this causes money demand to rise, this causes r to rise, this causes I to fall.

24) Suppose that interest rates rise.This will:

a.raise the present values of investment projects, leading investment to rise

b.lower the present values of investment projects, leading investment to fall

c.lower the present values of investment projects, leading investment to rise

d.raise the present values of investment projects, leading investment to fall

25) Suppose that the Federal Reserve conducts an open market purchase of government debt.This is a form of :

a.expansionary fiscal policy

b.contractionary fiscal policy

c.contractionary monetary policy

d.expansionary monetary policy

26) The salary of an American citizen working in London is part of:

a.U.K. GDP and U.S. GDP

b.U.K. GNP and U.S. GNP

c.U.K. GDP and U.S. GNP

d.U.K. GNP and U.S. GDP

27) Which of the choices below is atransfer paymentas defined in class?

a.the purchase of a government bond by the public

b.a payment of unemployment insurance to a person who just lost his job

c.the purchase of a new home

d.the salary of a U.S. soldier

28) Consider the numbers in the following chart.All figures are in billions of dollars. It is presumed that there is no government sector, so there is no government spending or taxes.

YC

400450

600600

800750

1000900

12001050

The marginal propensity to consume is:

a.increasing as income rises

b.constant at 0.25

c.constant at 0.75

d.equal to 1.0 at 600

29) Assume that the marginal propensity to consume is 0.8 and the marginal tax rate is equal to 0.Which of the following is themost

expansionary?

a.government spending is increased by $400 billion and taxes are cut by $150 billion

b.taxes are cut by $400 billion

c.government spending and taxes are both raised by $400 billion

d.government spending is increased by $400 billion

30) Consider the circular flow discussed in class.Assume that there is a government sector. The economy is in equilibrium if:

a.injections equal withdrawals

b.savings equals government spending

c.government spending equals investment

d.injections exceed withdrawals

31) The government is considering two plans to cut taxes.Under option X each person will get a $1,000 tax cut for this year only.Under option Y each person will get a $1,000 tax cut each year for the next thirty years.

Which of the following statements is true according to thelife-cyclemodel?

a.neither option X nor option Y will raise consumption this year

b.option Y will raise consumption more than option X this year

c.option X and Y will raise consumption by an equal amount this year

d.option X will raise consumption more than option Y this year

32) Suppose that the Federal Government cuts taxes and simultaneously it increases spending. At the same time the Federal Reserve cuts the

money supply.Which of the following will necessarily occur?

a.output will fall and interest rates may rise or fall

b.interest rates will rise and output may rise or fall

c.interest rates will fall and output may rise or fall

d.output will rise and interest rates may rise or fall

33) The government is considering two plans to cut taxes.Under option X each person will get a $1,000 tax cut for this year only.Under

option Y each person will get a $1,000 tax cut each year for the next thirty years.

Which of the following statements is true if economic agents make their decisions according to theKeynesian consumption function?

a.option Y will raise consumption more than option X this year

b.neither option X nor option Y will raise consumption this year

c.option X and Y will raise consumption by an equal amount this year

d.option X will raise consumption more than option Y this year