A Multiple-Choice Quiz, ECON2021 Basic Macroeconomics

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- This quiz is for discussion in tutorial classes. You should try the questions, based on the progress of lectures, before attending
tutorials. However, please don't submit. TA will selectively discuss some (but not necessarily all ) the questions.
-In test/exam, you may or may not be given multiple-choice questions. If these questions are given, however, the format
of these questions will be the same as this quiz.

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Question
papers must be returned. Write down your answers next to each question. Don't use pencil when a real test is given.
Notations follow the practice in textbooks and/or in lectures.

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Questions for "goods markets"

1) In our model of the goods market, which of the following variables is exogenous? 1)
A) saving (S)
B) consumption (C)
C) disposable income (Y D)
D) demand (Z)

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E) none of the above

2) Disposable income equals:

A) income minus private saving.
B) the sum of private consumption and private saving
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C) private consumption minus taxes.
D) income minus both private saving and taxes.
E) none of the above

3) The marginal propensity to consume represents: 3)

A) the change in output caused by a one-unit change in autonomous demand.
B) the ratio of total consumption to disposable income.
C) total income minus total taxes.
D) the change in consumption caused by a one-unit change in disposable income.
E) the level of consumption that occurs if disposable income is zero.
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Use the information below to answer the following questions:

C = 1000 + .75YD
I = 850
G = 2500
T = 1000

4) The equilibrium level of GDP for the above economy equals: 4)

A) 3600.
B) 4350.
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C) 13400.
D) 14400.
E) none of the above

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 5) The equation for household saving, S, for the above economy is: 5)

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A) -1000 + .75YD
B) 3350 + .25Y
C) 3350 + .75Y
D) -1000 + .25YD

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E) -1000 - .25YD

6) Based on our understanding of the paradox of saving, we know that a reduction in the desire to 6)
save will cause:
A) an increase in equilibrium GDP.
B) a permanent reduction in the level of saving.
C) an increase in the desire to invest.

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D) no change in equilibrium GDP.
E) a reduction in GDP.

7) Which of the following equals demand in an open economy? 7)

A) C + I + G + IM - X B) C + I + G
C) C + I + G + X D) C + I + G + X - IM

8) For a closed economy, which of the following conditions is necessary for goods-market 8)
equilibrium?
A) C = S.
C) X = IM = 0. O B) G = T.
D) none of the above

9) *An increase in the marginal propensity to save from .3 to .4 will cause: 9)

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A) the ZZ line to become steeper and a given change in autonomous consumption (c0 ) to have a
smaller effect on output.
B) the ZZ line to become flatter and a given change in autonomous consumption (c0 ) to have a
larger effect on output.
C) the ZZ line to become flatter and a given change in autonomous consumption (c0 )) to have a
smaller effect on output.
D) the ZZ line to become steeper and a given change in autonomous consumption (c0 ) to have a
larger effect on output.

10) Based on our understanding of a simple Keynesian model, we know with certainty that an equal 10)
and simultaneous increase in G and T will cause:
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A) an increase in investment. B) a reduction in output.

C) no change in output. D) an increase in output.

11) Suppose, as unrealistic as this might be, that disposable income is zero for a country. Given this 11)
information, we know that in the short run:
A) consumption must be zero.
B) the marginal propensity to consume must be zero.
C) the marginal propensity to save is infinitively high.
D) saving is negative.
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Questions for "financial markets"

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12) Which of the following is NOT a characteristic of bonds? 12)
A) cannot be used for transactions
B) pay zero interest
C) are sold for a price that varies inversely with the interest rate
D) all of the above.

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E) none of the above

13) Which of the following is NOT included as a component of money? 13)

A) saving
B) reserves
C) income
D) bonds
E) all of the above

A) savings accounts
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14) Which of the following is a liability for the central bank?

B) checkable deposits
C) loans
D) currency
14)
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E) bonds

15) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. 15)
Given this information, we know that the interest rate on the bond is:
A) 5.3%. B) 9.5%. C) 10%. D) 90%. E) 110%.

16) Which of the following is the direct consequence of the central bank's expansionary monetary 16)
policy?
A) a leftward shift in the money demand curve and a leftward shift in the money supply curve
B) a rightward shift in the money demand curve and a leftward shift in the money supply curve
C) a leftward shift in the money demand curve and a rightward shift in the money supply curve
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D) a rightward shift in the money demand curve and a rightward shift in the money supply
curve
E) none of the above

17) Which of the following events will most likely cause an increase in the money supply? 17)
A) a shift in public preferences away from checkable deposits toward currency
B) a central bank sale of bonds
C) a decrease in the ratio of reserves to deposits
D) all of the above
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E) none of the above

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 18) For this question, assume that individuals hold both currency and checkable deposits. The money 18)

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multiplier is equal to:
A) 1/θ.
B) 1/c.
C) 1/(1-c).

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D) 1/[c + θ(1-c)].
E) [c + θ(1-c)].

19) If individuals do not hold currency (CU), we know that [Note: θ is the reserve (R) to deposit (D) 19)
ratio]:
A) M = D.
B) H = R.

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C) the money multiplier is 1/θ.
D) all of the above
E) none of the above

20) Based on our understanding of the determinants of the interest rate and bond prices, we know that 20)
a reduction in income will cause:
A) an increase in bond prices and an increase in the interest rate (i)
B) a reduction in bond prices and an increase in i
C) an increase in bond prices and a reduction in i

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D) a reduction in bond prices and a reduction in i
E) none of the above

21) A reduction in the parameter c, the proportion of money individuals wish to hold as currency, will
tend to cause which of the following?
21)
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A) an increase in the monetary base (H) B) a reduction in the money multiplier
C) an increase in the money multiplier D) a reduction in H

22) An increase in income will cause: 22)

A) a reduction in the demand for currency.
B) a reduction in the supply of central bank money.
C) a reduction in the demand for reserves.
D) none of the above
E) both B and C

23) The interest rate will decrease as a result of which of the following events? 23)
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A) a higher product price level

B) an increase in income
C) an open market purchase of bonds by the central bank
D) all of the above
E) none of the above

24) An open market sale of securities will tend to cause: 24)

A) a reduction in the demand for reserves.
B) a reduction in the supply of central bank money.
CU

C) a reduction in the demand for currency.

D) none of the above

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 25) At the current interest rate, suppose the supply of money is greater than the demand for money. 25)

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Given this information, we know that:
A) the goods market is also in equilibrium.
B) production equals demand.
C) the price of bonds will tend to fall.

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D) the price of bonds will tend increase.
E) none of the above

Questions for "IS-LM model"

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26) Which of the following is the correct definition of the IS curve? 26)
A) The IS curve represents the combinations of output and the interest rate where the goods
market is in equilibrium.
B) The IS curve represents the combinations of output and the interest rate where the money
market is in equilibrium.
C) The IS curve represents the single level of output where the goods market is in equilibrium.

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D) The IS curve represents the single level of output where financial markets are in equilibrium.
E) none of the above

27) Which of the following causes a movement along a given (i.e., fixed) LM curve?
A) An increase in output causes an increase in money demand.
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B) A reduction in the interest rate causes investment spending to increase.
C) A reduction in the interest rate causes money demand to increase.
D) A reduction in the interest rate causes an increase in the money supply.
E) An increase in output causes an increase in demand for goods.

28) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the 28)
IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy
action.
A) Investment spending will increase.
B) There will be no change in investment spending.
C) Investment spending will decrease.
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D) none of the above can be known with certainty.

29) Suppose there is an increase in consumer confidence. Based on the IS-LM model where IS is 29)
downward-sloping and LM is upward-sloping, which of the following represents the complete list
of variables that must increase in response to this increase in consumer confidence?
A) consumption, investment and output
B) consumption
C) consumption, output and the interest rate
D) consumption and output
E) consumption and investment
CU

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 30) For this question, assume that investment spending depends only on output and no longer depends 30)

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on the interest rate. Given this information, in an IS-LM model, an increase in government
spending:
A) will cause investment to increase.
B) may cause investment to increase or to decrease.

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C) will have no effect on output.
D) will cause investment to decrease.
E) will cause an increase in output and have no effect on the interest rate.

31) Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know 31)
with certainty that this combination of policies must cause:
A) an increase in the interest rate (i). B) a reduction in i.

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C) an increase in output (Y). D) a reduction in Y.

32) An increase in the money supply must cause which of the following? 32)
A) no change in the interest rate if investment is independent of the interest rate
B) no change in output if investment is independent of the interest rate
C) an increase in investment and a rightward shift in the IS curve
D) a leftward shift in the IS curve

33) For this question, assume that investment spending depends only on output and no longer depends 33)

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on the interest rate. Given this information, an increase in the money supply:
A) will have no effect on output and the interest rate.
B) will cause investment to increase.
C) will cause an increase in output and have no effect on the interest rate.
D) will cause a reduction in the interest rate.
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E) will cause investment to decrease.

34) A central bank purchase of securities will most likely have which of the following effects? 34)
A) a rightward shift in the IS curve B) a leftward shift in the IS curve
C) an upward shift in the LM curve D) a downward shift in the LM curve

Questions for "labour market"

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35) In the wage setting relation W = PeF(u,z), the variable z includes which of the following variables? 35)
A) the minimum wage
B) the amount of structural change in the economy
C) unemployment benefits
D) all of the above
E) none of the above
CU

36) Based on price setting behavior, we know that a reduction in the unemployment rate will cause: 36)
A) an increase in the real wage. B) a reduction in the real wage.
C) an upward shift of the PS curve. D) no change in the real wage.

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 37) An increase in unemployment insurance will tend to cause which of the following? 37)

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A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve

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E) none of the above

38) Based on our understanding of the labour market model presented in the lecture, we know that a 38)
reduction in the markup will cause:
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) an increase in the natural rate of unemployment.

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D) a reduction in the natural rate of unemployment and no change in the real wage.

Questions for "AS-AD model"

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39) In the aggregate supply relation, the current price level depends upon:
A) expected price level.
B) fiscal policy.
C) monetary policy.
D) consumer confidence.
39)
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E) all of the above.

40) In the aggregate demand relation, a reduction in the price level causes output to increase because of 40)
its effect on:
A) the nominal wage.
B) the interest rate.
C) the expected price level.
D) government spending.
E) firms' markup over labour costs.

41) Suppose we wish to examine the determinants of the equilibrium real wage and equilibrium level 41)
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of employment (N). In a graph with the real wage on the vertical axis, and the level of employment
on the horizontal axis, the wage-setting relation will now be:
A) an upward sloping curve.
B) a downward sloping curve.
C) a horizontal line.
D) a curve that first slopes upward, then downward.
E) a vertical line.
CU

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 42) Assume the economy is initially operating at the natural level of output. Which of the following 42)

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events will initially cause a shift of the aggregate supply curve?
A) an increase in consumer confidence
B) an increase in the money supply
C) an increase in government spending

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D) all of the above
E) none of the above

43) Assume the economy is initially operating at the natural level of output. Now suppose a budget is 43)
passed that calls for a tax cut. This fiscal expansion will, before fully adjusting to the medium run
eventual equilibrium, cause an increase in:
A) the nominal wage.

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B) the price level.
C) the interest rate.
D) all of the above
E) none of the above

44) Which of the following represents the initial effects (i.e. before fully adjusting to the medium run 44)
equilibrium) of an increase in the markup rate?
A) an increase in the price level
B) a reduction in output

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C) an increase in the interest rate
D) all of the above
E) none of the above

45) Which of the following represents the eventual medium-run effects of a reduction in the markup 45)
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rate?
A) no change in the price level
B) no change in the level of output
C) a reduction in the interest rate
D) all of the above
E) none of the above

46) Answer this question using the AS/AD model presented in the lecture. Which of the following 46)
would cause a reduction in the natural level of output in the eventual medium run equilibrium?
A) an increase in taxes
B) a decrease in the money supply
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C) a decrease in government spending

D) both A and C
E) none of the above

47) For this question, assume that the economy is initially operating at the natural level of output. A 47)
monetary expansion will cause, in the eventual medium run equilibrium:
A) no change in the nominal wage. B) an increase in investment.
C) a reduction in the interest rate. D) no change in the real wage.
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Questions for "Economic Growth"

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48) In the absence of technological progress, we know that the level of output per worker in the steady 48)
state will
A) increase or decrease, depending on the rate of saving.
B) increase or decrease, depending on the rate of depreciation.
C) increase over time.

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D) decrease as a result of decreasing returns to scale.
E) remain constant.

49) In the absence of technological progress and population growth, suppose the following situation 49)
exists for an economy: Kt+1 /N > Kt/N. Given this information, we know that
A) saving per worker equals depreciation per worker in period t.
B) the saving rate fell in period t.
C) saving per worker is greater than depreciation per worker in period t.
D) saving per worker is less than depreciation per worker in period t.

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E) none of the above

50) Which of the following represents the change in the capital stock?
A) investment minus depreciation
C) output minus depreciation
B) consumption minus depreciation
D) investment minus saving
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51) Suppose there are two countries that are identical in every way with the following exception: 51)
Country A has a higher saving rate than country B. Given this information, we know with certainty
that
A) the level of consumption per worker will be higher in B.
B) the growth rate will be higher in A than in B.
C) the growth rate will be the same in the two countries.
D) the level of consumption per worker will be higher in A.

52) In the following production function, Y = F(K, NA), a 20% increase in A will cause which of the 52)
following variables to increase by 20%?
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A) labour
B) effective labour
C) output per worker
D) output
E) none of the above

53) In the production function Y = F(K, NA), for a given state of technology, constant returns to scale 53)
implies that output (Y) will increase by 7% when
A) N and A increase by 7%.
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B) K or NA increase by 7%.
C) K and N increase by 7%.
D) N or A increase by 7%.
E) all of the above

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 Use the following information to answer the questions below:

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(1) the rate of depreciation is 10% per year,
(2) the population growth rate is 2% per year, and
(3) the growth rate of technology is 3% per year.

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54) Refer to the information above. Which of the following represents the level of investment needed to 54)
maintain constant capital per effective worker (K/NA) in this economy?
A) .02K B) .05K C) .15K D) .10K E) .03K

55) Refer to the information above. Which of the following represents the steady-state growth rate of 55)
output in this economy?

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A) 3% B) 2% C) 10% D) 5% E) 15%

56) Suppose output per worker in a country has grown at the same rate as technology for many years. 56)
This country's growth would be described as
A) "effective" growth.
B) "diffuse" growth.
C) "steady-state" growth.
D) "appropriable" growth.
E) none of the above

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57) Assume that an economy experiences both positive population growth and technological progress.
In this economy, which of the following is constant when steady state in growth is achieved?
A) K/N
B) K
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C) NA
D) Y/NA
E) none of the above

58) Assume that an economy experiences both positive population growth and technological progress. 58)
Once the economy has achieved steady state in growth, we know that output (Y) is
A) growing at a rate of g A + gN.
B) constant.
C) growing at a rate of g A - gN.
D) growing at a rate of g N.
E) growing at a rate of g A.
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CU

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