Name MOHAMMED BHUIYAN Class Day of Week____________ Date 05/02/2020 Queensborough Community College Social Sciences Department Econ101 Macroeconomics Fall 2019 Prof. Marian Schoen Exam II Aggregate Demand, Aggregate Supply, and Demand Management Directions: There are 33 multiple choice questions. Read all questions carefully, then circle the letter of the statement that most accurately answers the question. When you are finished, transfer your answers to the Scantron sheet provided. There are also 4 extra credit questions at the end. You may answer a total of 10 points extra credit 1. The Aggregate Demand curve is downward sloping. This downward slope is partially due to the Interest Rate Effect which says that a. as the price level rises causing interest rates to rise, output will rise. b. as the price level rises causing interest rates to rise, foreigners buy more exports and output falls. c. as the price level rises causing interest rates to rise, big ticket purchases will fall, and output falls. d. as the price level rises causing interest rates to fall, foreigners buy fewer exports, and output falls. ANS: C. as the price level rises causing interest rates to rise, big ticket purchases will fall, and output falls. Cro 2. The Aggregate Demand curve can shif based on changes in the following determinants a. Household wealth, price of alternatives of production, technology, personal tax rates. b. Price of complements, household wealth, interest rates, personal taxes, technology. c. Household wealth, price of related goods, interest rates, business taxes d. Household wealth, interest rates, personal taxes, business taxes ANS B. Price of complements, household wealth, interest rates, personal taxes, technology. 3. Households finance their purchases a. By liquidating savings, increasing debt, or spending income b. By issuing bonds c. By accumulating wealth or paying taxes ANS A. By liquidating savings, increasing debt, or spending income 4. For the following statistics, find the marginal propensity to consume. Yd C a. 3/ 4 400 320 b. 4/5 450 360 c. 2/3 d. 32/40 ANS B. 4/5 5. When the price of oil increases significantly a. Aggregate demand increases and shifs right b. Aggregate demand decreases and shifs lef c. Aggregate supply increases and shifs right d. Aggregate supply decreases and shifs lef ANS A. Aggregate demand increases and shifts right 6. When the US dollar strengthens a. US exports decrease and US imports increase b. US exports decrease and US imports decredrawase c. US exports increase and US imports increase d. US exports increase and US imports decrease ANS A. US exports decrease and US imports increase 7. When interest rates increase a. Businesses are likely to spend less and households are likely to spend more b. Businesses are likely to spend more and households are likely to spend less c. Both businesses and households are likely to spend more and increase aggregate demand d. Both businesses and households are likely to spend less and decrease aggregate demand ANS D. Both businesses and households are likely to spend less and decrease aggregate demand 8. If Government Spending increases $50 billion when MPC = 4/5, then spending a. Increases $40 billion b. Decreases $40 billion c. Increases $50 billion d. Decreases $50 billion ANS B. Decreases $40 billion 9. When unemployment is high, government can use the following Demand Management Tools a. Increase government spending, reduce interest rates, increase taxes b. Reduce government spending, increase interest rates, increase taxes c. Reduce government spending, increase interest rates, reduce taxes d. Increase government spending, reduce interest rates, reduce taxes ANS D. Increase government spending, reduce interest rates, reduce taxes 10. The Recessionary Expenditure Gap is a. The amount by which expenditures must rise to bring the economy to full employment b. The difference between output at full employment and current output c. the amount by which expenditures must fall to reduce inflation ANS A. The amount by which expenditures must rise to bring the economy to full employment In an economy where current output is $900 billion and the MPC = 7/8, government institutes a $16 billion tax decrease. 11. The multiplier is (show formula) (1/MPS= 1/1-MPS=1/1-7/8=1/1/8=1/0.125=8) a. 2 b. 7 c. 8 d. 16 ANS C. 8 12. The initial change in spending is (show formula) a. - $16 billion b. + $16 billion c. - $14 billion d. + $14 billion ANS D SHOW FORMULAS AND ALL WORK FOR THESE PROBLEMS 13. If the original output level was $10,000 billion and the change in output was an increase of $500 billion, the new output would be a. $10,000 billion b. $10,500 billion c. $9,500 billion 10,000B+500B = 10,500B d. $5,500 billion ANS IS B. 14. In another economy, the MPC = .8 or 4/5, government needs to increase expenditure $30 billion to complete a project, but it does not want to increase debt, so it increases taxes $30 billion, as well. In this balanced-budget scenario, what, if any, will be the change in output generated? a. +$30 billion ANS A c. +$150 billion b. - $30 billion d. $0 billion 15. In an economy, if current output = $12,000 billion, MPC = .75 or , and full-employment output = $12,500 billion, the GDPGAP is a. $12,000 billion b. $12,500 billion 12,000B-12,500B = 500B c. $500 billion d. $100 billion ANS C 16. Using Okun's Law, if the GDPGAP, as a percent of full-employment output is 5%, by how much does the unemployment rate exceed the full-employment unemployment rate? (How much is the cyclical unemployment rate?) a. 1% c. 10% b. 5% d. 2.5% ANS D. 2.5% 17. To stimulate the economy when one believes in small government, it would be best to a. Increase interest rates b. Increase government spending c. Reduce taxes d. Reduce government spending ANS B. Increase government spending 18. To stimulate the economy when one believes that government should support social programs, it would be best to a. Increase government spending b. Increase taxes c. Reduce government spending d. Reduce interest rates ANS C Reduce government spending 19. Which is NOT PART OF CURRENT PHILOSOPHY a. Most current demand-management of the economy should be with fiscal policy tools b. Most current demand-management of the economy should be with interest rate management. c. Use of government spending and tax changes is best when there is a significant recession. 20. Three important determinants used to shif the aggregate supply curve are a. Government regulation, costs of production, business taxes b. Technology, consumer confidence, foreign exchange rates c. Technology, government regulation, government spending d. Costs of production government regulation, costs of alternatives of production ANS A Government regulation, costs of production, 21. Which statement is incorrect about Treasury Debt? business taxes a. b. c. d. Treasury borrowings come in 3 maturities: Treasury Bills, Treasury Notes, Treasury Bonds Only US residents can buy Treasury Securities Federal Agencies can invest in Treasury Securities The Congress has to limit the amount of Treasury Debt Outstanding ANS B. Only US residents can buy Treasury Securities 22. thr statement is true? a. Built-in stabilizers are part of discretionary fiscal policy b. Built-in stabilizers include public works programs, progressive tax structure, welfare c. Built-in stabilizers include proportional tax structure, food stamps, unemployment insurance d. Built-in stabilizers include progressive tax structure, welfare, unemployment insurance ANS D. Built-in stabilizers include progressive tax structure, insurance welfare, unemployment 23. The deficit is a. The amount by which receipts exceed expenditures b. The amount owed by the borrowing entity c. The amount by which expenditures exceed receipts ANS A The amount by which receipts exceed expenditures 24. Which statement is NOT TRUE a. There is no limit on the amount of Treasury Debt that can be issued. b. In recent history 30-50% of Federal Debt is owned by parts of the Federal Government c. China, and Japan own significant amounts of Federal debt d. About 50-70% of Federal debt is owned by \"the public\" ANS A.There is no limit on the amount of Treasury Debt that can be issued. 25. Which statement is NOT TRUE (Draw curves to reflect these scenarios to check.) a. When the AS curve shifs right, it helps to reduce both inflation and unemployment b. A shift right of AD curve, helps to reduce both inflation and unemployment c. A shif lef of the AS curve, creates cost-push inflation Match definitions to the \"terminology\" in the questions a. Increased government borrowing in the bond market tends to increase interest rates making it more expensive for businesses in the private sector to borrow and therefore cutting down on the amount of private sector borrowing. b. As the price level rises, interest rates rise and the household purchase of \"big ticket items\" and the business investment is reduced, therefore output is reduced. c. As the price level rises, household wealth can buy fewer items (the value of household wealth is reduced), and therefore output is reduced. d. As the price level rise relative to foreign prices, it is more expensive for foreigners to buy US products, reducing US exports, and less expensive for US consumers to buy foreign goods, promoting US imports. Thus, US output decreases. e. The US Federal Government borrows by issuing US Treasury bonds, notes, and bills. 26. The \"foreign effect\" refers to a. \"a\" b. \"b\" c. \"c\" d. \"d\" e. \"e\" ANS D 27. \"Crowding Out\" refers to a. \"a\" b. \"b\" c. \"c\" d. \"d\" e. \"e\" ANS A 28. The \"real balances effect\" or \"wealth effect\" refers to a. \"a\" b. \"b\" c. \"c\" d. \"d\" e. \"e\" ANS B 29. US Government debt refers to a. \"a\" b. \"b\" c. \"c\" d. \"d\" e. \"e\" ANS E 30. For the AS curve pictured, indicate which answer is correct. AS a. In the short run, input prices and output prices are fixed b. In the immediate short run, input prices are fixed and output prices are flexible c. In the long run, input prices and output prices are flexible. ANS B. In the immediate short run, input prices are fixed and output prices are flexible 31. Using the diagram above, indicate which answer is correct. a. In the Keynesian portion of the AS curve, as AD increases, output increases, but the price level stays the same. b. In the Keynesian portion of the AS curve, as AD increases, both output and the price level increase. c. In the Keynesian portion of the AS curve, as AD increases, output does not increase, but the price level increases. ANS : C In the Keynesian portion of the AS curve, as AD increases, output does not increase, but the price level increases. 32. Indicate which is NOT a supply side policy a. Decreasing Government Regulation b. Increasing the Investment Tax Credit c. Increasing Government Spending d. Reduce Interest Rates ANS B Increasing the Investment Tax Credit 33. The government buys and produces different types of goods and services than does the household sector and the business sector. Therefore there will be a difference in the type of output produced if the economy is stimulated by an increase in government spending or a reduction in taxes. If taxes are reduced, from which project will the economy benefit? a. A new 4-lane highway b. A new shopping center c. A new library d. A new bridge ANS B A new Shopping Center EXTRA CREDIT ON THE NEXT PAGE EXTRA CREDIT Problem 1: 6 points Show all formulas and all work Given: Rufull employment = 2% Ru = 4% Potential GDP= $12,000 billion MPC = = .75 1. Find the multiplier (1/MPS= 1/1-MPS=1/1-3/4=1/1/4=1/0.25=4) 2. Find GDPGAP 12,000B 12,000B-0 = 12,000B 3. Find the Recessionary Expenditure GAP 12,000b/4 = 3,000B 4. Find the Government Spending that could close the GDPGAP 12,000B*1/1-3/4= 1199.25B 5. Find the Tax change that could close the GDPGAP 6. Find the amount of spending necessary to close the GDPGAP under a Balanced Budget spending program. Problem 2: 4 points Indicate 2 built-in stabilizers and how they function during a recession and expansion. Automatic stabilizers they offset fluctuations in demand by reducing taxes and increasing government spending during a recession, and they do the opposite for expansion. Extra Credit Continued on next page Problem 3: 3 points Present a table that th and indicates what is done with each tool to 1) stimulate the economy and to 2) restrain the economy. Problem 4: 4 points There are two basic philosophies in Congress: 1. those who believe in small government And 2. those who believe the Federal Government should provide many Social Programs Indicate how those holding each of the philosophies above would use the 2 Fiscal Policy Tools to a) stimulate the economy and b) restrain the economy. 1. Small government, on the other hand, is generally believed to lead to a more efficient and flexible system. 2. Economists charge that big government interferes with the mechanisms of free enterprise