Final Exam (2011) - Macroeconomics (40 points)– Type A

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Answers to the multiple choice questions: (20 points)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1. The Bank of Korea aims to maintain its target interest rate at 3.25 percent per year. When the government increases it spending, what would be the effects of on income, consumption, investment, prices in the short run? What about in the long run? Explain using the IS-LM model and AD-AS model simultaneously. (10 points.)

2. Should policy be active or passive? Give at least three explanations why some economists argue that macroeconomic policy should be passive. What is your opinion about this debate. (10 points. Please write your answer in the back page).

Multiple choice questions. (10 points)

1. In the Keynesian cross model of Chapter 10, if the MPC is 0.8, and government expenditure is increased by $100 and taxes are also increased by $100, respectively, how much does income change?

(1) It increases by $100. (2) It decreases by $100. (3) It increases by $500. (4) It decreases by $900. (5) It increased by $1,000.

2.Which of the following statements is FALSE?

(1) The IS curve represents all combinations of interest rate and income that would result in equilibrium in the goods market.

(2) The LM curve represents all combinations of interest rate and income that would result in equilibrium in the money market.

(3) The equilibrium condition in the goods market is:

(4) The equilibrium condition in the money market is:

(5) The intersection determines the combinationof Y and r that satisfies equilibrium in both goods and money markets.

3. If there is an exogenous increase in the investment, then

(1) the LM curve would shift to the left. (2) the LM curve would shift to the right.

(3) the IS curve would shift to the left. (4) the IS curve would shift to the right.

(5) the AD curve would shift to the left.

4. In the IS-LM model, when the MPC is 0.8, and the government decreases its tax revenueby $100,how much does income change?

(1) It decreases by $400. (2) It decreases by less than $400. (3) It increases by $400. (4) It increases by less than $400. (5) None of above.

5. If the price level increases, then

(1) the LM curve would shift to the left. (2) the LM curve would shift to the right.

(3) the IS curve would shift to the left. (4) the IS curve would shift to the right.

(5) None of the above.

6. Which of the following is endogenous in the AD-AS model?

(1)money supply (2)taxes (3)The interest rate

(4) the price level (5) government expenditure

7. If the government decreasesitstax revenue and the central bank decreases the money supply, then the combined effect of these two policies would cause

(1) interest rate to decline and income to fall. (2)both the interest rate and income to decrease

(3) interest rate to decrease but income cannot be determined from the information given.

(4) interest rate to increase but income cannot be determined from the information given.

(5) income to decrease but interest rate cannot be determined from the information given.

8. If the short-run AS curve is horizontal and the long-run AS curve is vertical, then an increase in the money supply will in the short run and in the long run.

(1) increase only prices; increase only output.

(2) increase only output; increase only prices.

(3) decrease only prices; decrease only output.

(4) decrease only output; decrease only prices.

(5) increase both prices and output; only prices.

9. If there is an adverse supply shock such as a sharp increase in oil prices, then in the short run.

(1) the AS curve would shift downward causing the price to increase and income to decrease.

(2) the AS curve would shift downward causing the price to decrease and income to increase.

(3) the AS curve would shift upward causing the price to increase and income to decrease.

(4) the AS curve would shift upward causing the price to decrease and income to increase.

(1) the AD curve would shift downward causing the price to decrease and income to decrease.

10. Which of the following statements is FALSE?

(1) The inside lag is the time between a shock to the economy and the policy action responding to that shock.

(2) The outside lag is the time it takes for policy to affect economy.

(3) Because of the existence of the inside lag and the outside lag, the stabilization policy cannot easily stabilize the economy.

(4) Outside lag is usually longer for fiscal policy than for monetary policy.

(5) Fiscal policy has a much longer inside lag than monetary policy.

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