' n-A TRLJEJEALSE Questions (maximum 21 marks) 1) If disposable income (DI) is 275 billion and the average propensity to consume (APC) is 0.8. it can be concluded that saving is 55 billion. For a closed private economy aggregate expenditure (AE) is composed of, C + lg. The downward slope of the aggregate demand (AD) curve is explained by declining production costs as output increases. If the MPC equals zero. then the multiplier would be 1. The wealth or real balances effect indicates that a higher price level will decrease the real value of money and other nancial assets which will cause a decline in spending. The interest-rate effect suggests that an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. The classical theory of employment held that an excess of saving over investment at any given interest rate would cause the interest rate to fall. As disposable income goes up, the average propensity to save (APS) falls. If a consumption schedule shifts upward, this necessarily means that the average propensity to consume (APC) is now higher at each level of disposable income. 9) If a consumption schedule shifts upward, this necessarily means that the average propensity to consume (APC) is now higher at each level of disposable income. 10) The equation C = 35 + .75Yd ; where, C = consumption and Yd = disposable income tells us that households will consume three-fourths of whatever level of disposable income they receive. 11) The multiplier will be greater, the smaller the slope of the saving schedule. 12) If the marginal propensity to consume (MPC) is constant at various levels of DI, then the APC must also be constant at all these income levels. 13) When a bank loan is repaid, the money supply decreases. 14) Fiat money refers to all "near monies\" (e.g. short term deposits). 15) The opportunity cost of holding money varies directly with the interest rate. 16) Various 'safety net' programs are a part of discretionary scal policy. 17) The present choice of position on the production possibilities curve will not inuence the future location of the curve. I Hul- MULTIPLE CHOICE Quest'ions(maximum 54 marks): 1))The greater is the marginal propensity to consume (MPC): a) the smaller is the average propensity to save (APB). b) the lower is the price level. c) the higher the value of multiplier. d) the larger is the marginal propensity to save (MP5). 2) At the break-even level of income, the average propensity to save (APS) is: a) equal to one. b) equal to APC. c) less than one. d) equal to zero. The next THREE questions are based upon the following data of a hypothetical economy: Disposablelncome Saving Tk. 0 billion Tk. -10 billion 50 0 100 10 150 20 200 30 3) The marginal propensity to consume (MPC) is: a) .80 b) .75 c) .20 d) .25 e) .10 4) At the Tk.100 billion level of income, the APS is: a) .10 b) .20 c) .25 d) cannot be determined from the data given. 5) If plotted on a graph, we would expect the slope of the saving schedule to be: a) .80 b) .10 c) .20 d) .15 6)The simple (expenditure) multiplier may be calculated as: a)1/(MPS+MPC). b)1 MPC=MPS. c) 1/ (1 MPC) d)MPC/MPS. 7) Other things being equal, if the interest rate falls and business taxes fall, investment: a) is likely to decrease. b) is likely to increase. c) is not likely to change. d) may increase, decrease. or stay the same. 8) Say's Law states that: a) any equality of aggregate expenditures and aggregate output is accidental: b) investment supplements total consumption so that aggregate spending tends to exceed total output. c) the production of any level of output will generate sufcient demand to purchase that output. d) because people save, aggregate spending will tend to fall short of (buying back) the total output. 9) A normative statement is one which: a) is based on the law of averages. b) pertains only to microeconomics. c) pertains only to macroeconomics. d) is based upon value judgments. e) None of the above. 10) All of the following would affect the position of a country's production possibilities curve, except: a) the quantity of labor. b) the level of unemployment. c) the quantity of accumulated capital. d) technological progress. Page-3 11) The amount of real domestic output that will be purchased at each possible price level is shown by the: a) aggregate supply curve. b) aggregate demand curve. c) business cycles graph. d) difference between real and nominal GDP. Next TWO questions (#12 and #13) are based upon the following information: a) military goods b) producer's durables (e.g. machinery, equipment, etc.) c) textile products (clothing) d) agricultural commodities (e.g. wheat, corn, etc.) 12) In which of the above industries or sectors of the economy is output likely to be most strongly affected by the business cycle? 13) In which of the above industries or sectors of the economy is price likely to be most strongly affected by the business cycle? 14) A point inside a production possibility curve may indicate: a) unemployment. b) the inefcient allocation of resources. c) not using the best available technology. d) all of the above. e) none of the above. 15) The law of increasing opportunity costs is based upon the fact that: a) the value of the local currency has diminished owing to persistent ination. b) wage rates invariably rise as the economy approaches full employment. c) resources are not equally efcient in producing various goods. d) consumers tend to value any good more highly when they have little of it. 16) Which of the following is a stabilizing force in classical economics: a) the interest rate. b) flexible price level in the economy. c) wages in the economy if they are flexible. d) all of the above. 17) In contrast to the investment schedule, the consumption schedule is: a) down sloping. b) relatively stable. c) relatively unstable. d) horizontal. Next TWO questions are based upon the following graph: $270 45 1. 240 C 210 180 150 Consumption (C) 120 90 60 30 This study source was downleaded by 100000764208631-from CourseHere.com on-04-08-2022 46:29:41 GMT -05:00 $30 60 90 120 150 180 210 240 270 300 Gross domestic product (Y)Pa ge-4 18) The break-even level of income in graph: a) is zero. b) is $150. c) is $60. d) cannot be determined from the information given. 19) The average propensity to consume is: a) greater than 1 at all levels of GDP above $150. b) zero. c) greater than 1 at all levels of GDP below $150. d) 0.6. 20) Other things being equal, the real interest rateand thr level of investment are: a) related only when saving equals planned investment. b) unrelated. c) inversely related. d)directly related. 21) An "inationary gap\" can best be described as the amount by which: a) equilibrium GDP falls short of the full-employment GDP. b) aggregate expenditures exceed any given level of domestic output. c) aggregate expenditures exceed the full-employment level of domestic output. d) saving exceeds investment at the full-employment level. 22) The "crowding out\" effect suggests that: a) imports are replacing domestic production. b) consumption is increasing at the expense of investment. c) government spending is increasing at the expense of private investment. d) private investment is increasing at the expense of government spending. 23) Stock market price quotations best exemplify money serving as a: a) store of value. b) measure of value. c) medium of exchange. d) index of satisfaction. 24) The value of money varies: a) directly with the price level. b) directly with the interest rate. c) directly with the volume of employment. d) inversely with the price level. 25) The total demand for money curve will shift to the right as a result of: a) a decline in nominal GDP. b) an increase in nominal GDP. c) a decline in the interest rate. d) an increase in the interest rate. 26) The amount which a commercial bank can lend is determined by its: a) required reserves. b) outstanding loans. c) excess reserves. d) outstanding demand deposits. 27) The purchase of government securities from the public by the Central Bank will cause: a) commercial bank reserves to increase. b) the money supply to increase. c) demand deposits to increase. d) all of the above are true. e) none of the above is true. 28) Monetary policy is expected to have its greatest impact upon: a) the MP5, and therefore, the size of the multiplier. b) gross exports (X) c) consumption (C). d) gross investment (lg) e) government spending (G). 29) The main purpose of a tight money policy is to: a) alleviate recessions. b) raise interest rates and restrict the availability of bank credit. c) increase government spending. d) shift the aggregate expenditures schedule upward. 30) Classical theory envisions the aggregate supply curve as being: a) upsloping, but quite at. b) downsloping. c) vertical. d) horizontal. Section B(25 marks in this section} Question #1 Examine the following statements and state whether they are TRUE or FALSE. You must juslfy your answer by explaining clearly. Choose any 3 out of the following 4 statements. (6 marks x 3 = 18 marks) a) An economy can temporarily achieve some combination of goods outside of its production possibility curve by importing more goods than it exports. b) The average propensity to consume (APC) declines continuously as the level of real income in the economy increases owing to the 'Psychological Law of Consumption'. c) According to the classical economists, a deficiency of total spending would cause prices and wages, but not output and employment to decline. d) The purchase of the BEXIMCO stock is a part of gross, but not of net private domestic investment