Section 1Multiple Choice QuestionsTotal Points 70

CHAPTER 8THE CLASSICAL LONG-RUN MODEL

1. According to Keynesian economists,
a. the economy will return quickly to full employment in most cases
b. if output is below its potential, the economy will soon return to full employment
c. production can be stuck below its full-employment level for extended periods of time
d. the Great Depression proved that classical economics does a good job of explaining how the
economy operates
e. he economy will achieve full employment in the short run but, in the long run, GDP will
fluctuate

2. Say's Law
a. is valid only in a simple economy without financial markets
b. led economists during the 1920s to encourage the government to adopt flawed economic
policies that led to the Great Depression
c. assures us that in the aggregate, firms are able to sell their output so that full employment
can be sustained
d. tells us that in the long run, markets clear
e. tell us that firms must carefully monitor consumer spending and saving in order not to
produce more than consumers are willing to purchase

a. markets are perfectly competitive in the short run
b. markets clear in the long run
c. markets clear in the short run
d. markets are perfectly competitive in the long run
e. all variables are expressed in nominal terms

4. The labor supply curve shows
a. how much output a firm will supply with a given amount of labor
b. how much labor a firm will want to hire at each wage rate
c. how much output people will want to buy if they supply a given amount of labor
d. how much labor a firm will need with a given amount of machinery and equipment
e. how many people will want jobs at each wage rate

a. is now discredited
b. was developed by John Maynard Keynes
c. has been completely displaced by the short-run macro model
d. helps us to understand the performance of the economy in the long run
e. is most useful in helping us to predict when an economic downturn will occur

3. A critical assumption in the classical model is that

5. The Classical model




6. Refer to Figure 8-1. According to the graph, the equilibrium real hourly wage and quantity of labor
employed, respectively, are
a. $10, 110 million workers
b. $8, 130 million workers
c. $8, 150 million workers
d. $6, 150 million workers
e. $6, 130 million workers


7. Refer to Figure 8-1. If the real hourly wage rate was $6, what would be the effect?
a. There would be a shortage of 40 million workers and the wage rate would rise.
b. There would be a shortage of 20 million workers and the wage rate would rise.
c. There would be a surplus of 40 million workers and the wage rate would fall.
d. There would be a surplus of 20 million workers and the wage rate would fall.
e. There would be unemployment.



8. What is the full-employment output level?
a. The output level that results when the loanable funds market clears
b. The output level that results when the returns to labor are zero
c. The output level that results when factories are completely full
d. The output level that results when the labor market clears
e. The output level that would occur if the output level was positive.



9. Assuming the economy was in equilibrium, use the following information to calculate the total value of
leakages.

Consumption Spending $3.5 trillion
Net Taxes $2.7 trillion
Household Saving $2.5 trillion
Investment Spending $2.2 trillion
Government Purchases $3.0 trillion

Total leakages are
a. $2.5 trillion
b. $2.7 trillion
c. $3.0 trillion
d. $5.2 trillion
e. $5.7 trillion




10. What is the equilibrium condition in the loanable funds market?
a. S + G = I
P
- T
b. S = I
P
+ T - G
c. S + I
P
= G - T
d. S - T = I
P
+ G
e. S = I
P
+ G - T





11. According to the classical model, if the government wanted to increase employment, it could do so by
increasing its own spending. That would lead firms to produce more output, for which they would need
to hire more workers.
a. True
b. False

CHAPTER 9ECONOMIC GROWTH AND RISING LIVING STANDARDS




12. In the 1970s and 1980s policies that required retirement of people over age 65 were repealed. Which
variable would this directly affect?
a. The employment-population ratio
b. Productivity
c. Average hours
d. Population
e. Technology.

demand curve?
a. A trend toward earlier retirement ages
b. An increase in the working-age population
c. A reduction in the number of guaranteed student loans
d. An increase in college work-study programs
e. A decrease in personal income tax rates



14. Refer to Figure 9-4. Which of the following policies would most likely shift the supply of loanable
funds curve from S
1
to S
2
?
a. Introduction of an investment tax credit
b. Cutting the corporate profits tax rate
c. Increasing personal income tax rates
d. Eliminating taxes on interest income
e. Decreasing the government's budget deficit



13. Which of the following would lead to an (eventual) increase in the labor force by shifting the labor




15. Many less developed countries have low rates of economic growth because
a. high population growth rates reduce living standards
b. low population growth rates result in an inadequate labor supply
c. high current output per capita reduces incentives for growth
d. interest rates are too high
e. they invest too much in infrastructure leaving little for private capital investment



16. Refer to Figure 9-13. An increased labor supply on the graph would
a. decrease total output
b. increase total output at a constant rate
c. increase total output at an increasing rate
d. increase total output at a decreasing rate
e. not change total output

17. Government policies designed to increase the skills of the work force shift the labor demand curve to the
right, increasing employment and total output.
a. True
b. False

18. One way for a less-developed country to break its cycle of poverty is to target the wealthy.
a. True
b. False.


CHAPTER 10ECONOMIC FLUCTUATIONS


19. Which of the following occurs during a recession?
a. Output falls, employment rises, and unemployment rises.
b. Output rises, employment falls, and unemployment falls.
c. Output falls, employment falls, and unemployment rises.
d. Output rises, employment rises, and unemployment falls.
e. Output falls, employment falls, and unemployment falls.


20. As the economy goes through an expansion,
a. fluctuations in GDP become more severe
b. unemployment finally stabilizes
c. investment stabilizes
d. the classical model becomes a better predictor
e. unemployment falls.


21. What would a leftward shift of the labor demand curve indicate?
a. Firms want to hire more workers than before at any given wage than before.
b. Firms want to pay a higher wage than before at any given level of employment.
c. Households want to supply fewer hours of work than before at any given wage rate.
d. Firms want to hire fewer workers than before at any given wage rate.
e. Households want to supply more hours of work than before at any given wage rate.

CHAPTER 11THE SHORT-RUN MACRO MODEL


22. The short-run macro model
a. relies on the market-clearing assumption
b. is used primarily for long-run analysis
c. is used primarily for short-run analysis
d. focuses on the supply of and demand for resources
e. focuses on fluctuations in the financial markets to explain fluctuations in real GDP


23. Disposable income is best defined as
a. income adjusted for inflation
b. nominal income
c. the income remaining after bills have been paid
d. income after taxes have been paid and transfers received
e. income paid in dollars that are worthless


24. Use the table below to determine autonomous consumption spending.

Real Real
Disposable Consumption
Income Spending
($Billions) ($Billions)

200 320
400 460
600 600
800 740
1,000 880
1,200 1020
a. $0
b. $100
c. $180
d. $200
e. $1,000

25. Use the table below to find the marginal propensity to consume.

Real Real
Disposable Consumption
Income Spending
($Billions) ($Billions)
$1,000 $ 750
1,100 815
1,200 880
1,300 945
a. 0.50
b. 0.60
c. 0.65
d. 0.75
e. 0.80.

26. If net taxes were lowered from $5,000 to $1,000, the marginal propensity to consume is 0.75, and
autonomous consumption spending is $10,000, by how much would consumption increase in the first
round of expenditures?
a. $3,000
b. $1,250
c. $7,500
d. $3,750
e. $750.


27. Refer to Figure 11-7. If the economy is currently producing at point X, what does the short-run macro
model predict will happen?
a. Nothing will happen; the economy is in equilibrium.
b. Prices will rise and firms will increase production.
c. Prices will fall and firms will increase production.
d. Inventories will shrink and firms will increase production.
e. Inventories will accumulate and firms will cut production.




28. If the expenditure multiplier is 3.5 and investment spending increases by $2,000 billion, what will be the
change in GDP?
a. $2,000 billion
b. $5,000 billion
c. $571.4 billion
d. $3,500 billion
e. $7,000 billion


29. If an economy is at equilibrium, it will also be operating at full employment.
a. True
b. False







30. Consider Figure 11-10 above. If the full employment level of output is $9 trillion, and there is no
exports or imports, which of the following is true?
a. The economy is currently operating at the full employment level
b. The economy is currently operating below than the full employment level
c. The economy is currently operating above the full employment level
d. The economy is operating neither at equilibrium nor full employment
e. Prices are rising.

CHAPTER 12---FISCAL POLICY
31. Which of the following is a transfer payment?
a. The federal government's budget deficit
b. Unemployment compensation payments
c. Military spending
d. Wages of government employees
e. The excise tax on gasoline.


32. Which of the following can occur simultaneously?
a. An increase in the national debt and a budget surplus
b. A decrease in the national debt and a balanced budget
c. An unchanged national debt and a budget deficit
d. Positive national debt and a budget surplus
e. A decreasing national debt and a budget deficit.

33. In an expansion,
a. federal budget deficits tend to rise
b. federal budget deficits tend to fall
c. the federal debt tends to rise faster than in a recession
d. federal government tax receipts tend to fall
e. there is pressure on the Fed to monetize the debt


34. Countercyclical fiscal policy has a serious problem with
a. overshooting the desired impact by a factor of 10.
b. the irreversibility of actions.
c. the tendency of the Federal Reserve to immediately counter Congressional action.
d. the courts as it has been held to be unconstitutional.
e. overshooting the desired impact by a factor of 3.


35. If we look at governmental budgets over time using nominal figures, we
a. have a clearer understanding of the real size of the budget
b. are able to focus on the real impact of government spending on potential GNP
c. tend to overestimate the size of the budgetary growth
d. usually underestimate the size of the burden of the debt
e. are ignoring what we can learn from nominal data



Section 2Essays and AnalysisTotal Points 30

1. Classical and Keynesian economists differ diametrically in their views regarding the impacts of
government spending. Explain the impacts of a $700 billion increase in a government spending
program on output (income), comparing and contrasting the multiplier effect in the Keynesian
theory and the crowding out effect of the Classical approach. Use both words and graphs of both
models in your analysis (10 pts).

2. The table below shows disposable income and consumption in an economy (without the govern-
ment) (10 pts total)

Disposable income
($)
Consumption
($)
0 100
1000 875
2000 (1650 = 875+775)
3000 (2425 = 1650+775)

a) Assume that marginal propensity to consume (MPC) does not change with income. Compute the au-
tonomous consumption (1 pt) and the MPC. (4 pts)


b) Compute consumption and saving when income is $3000. (5 pts)

Macroeconomics 202 Page 13
Fall 2012 Term, 2
nd
Midterm
Professor Hellman

3. Assume the consumption function is C = 150 + .7*Y (assuming that there is no government, so
G=T=0) (10 points total).
a) If the economy reaches equilibrium when output (income) is equal to $3000, how much must be the
planned investment (I)? (5 pts)
equilibrium? Why? (2 pts) How much is the change in inventory? (3 pts)












b) Assume again that output (income) is $3000. If the planned investment is now $400, is the economy at