Q1. MCQs

1. An adverse supply shock would cause the FE line to

(a) shift to the right.

(b) shift to the left.

(c) remain unchanged.

(d) remain unchanged if the shock is temporary; shift to the right if the shock is permanent.

2. Any change that reduces desired saving relative to desired investment (for a given level of output)

causes the real interest rate to _____ and shifts the IS curve _____.

(a) increase; down and to the left

(b) increase; up and to the right

(c) decrease; down and to the left

(d) decrease; up and to the right

3. A rise in the price of a bond causes the yield of the bond to

(a) rise.

(b) fall.

(c) remain unchanged.

(d) rise if it's a short-term bond, fall if it's a long-term bond.

4. In equilibrium economy, if private savings equals private investment as well as the budget surplus is positive. Given the above, which of the following is true?

a. Y > C + I + G

b. C + I + G > Y.

c. NX < 0.

d. X = Q.

e. None of the above is true.

5. When a person receives an increase in wealth, what is likely to happen to consumption and saving?

(a) Consumption increases and saving increases.

(b) Consumption increases and saving decreases.

(c) Consumption decreases and saving increases.

(d) Consumption decreases and saving decreases.

6. If the substitution effect of the real interest rate on saving is smaller than the income effect of the

real interest rate on saving, then a rise in the real interest rate leads to a _____ in consumption and a

_____ in saving, for someone who's a lender.

(a) fall; fall

(b) fall; rise

(c) rise; rise

(d) rise; fall

7. Which of the following would cause the IS curve to shift inwards?

a. An increase in autonomous investment.

b. An increase in the rate of interest.

c. A decrease in the rate of interest.

d. An increase in autonomous private savings.

e. Both B) and D).

8. An increase in the expected real interest rate tends to

(a) raise desired savings only.

(b) raise desired investment only.

(c) raise both desired savings and desired investment.

(d) raise desired savings, but lower desired investment.

True and False

_____ 1. Keynesians believed that monetary policy was the optimal tool for fine-tuning the economy.

_____ 2. Both monetarists and Keynesians believed in the non-neutrality of money.

_____ 3. The aggregate demand curve is equivalent to the output demand curve and factors that shift the aggregate demand curve shift the output demand curve.

_____ 4. The Keynesian sticky wage model predicts that employment, consumption, and investment are procyclical while prices and real wages are countercyclical.