University of Guelph Department of Economics & Finance
ECON*2410/McKenna F14
QUIZ 1A (GREEN)
ANSWERS 1. T F U If the Japanese CPI is currently 108 and the US
CPI is at 104, then the Japanese inflation rate is higher than the
US inflation rate. 2. T F U The equilibrium condition in the goods
market states that consumption equals output. 3. T F U Income and
savings are both examples of flow variables. 4. T F U The Bank of
Canada can increase the supply of money by buying bonds in the bond
market. 5. T F U If both government spending and taxes increase by
the same amount, the IS curve doesnt shift. 6. T F U An increase in
investment spending shifts the LM curve to the right. 7. Consider a
closed economy with no income taxes and a fixed interest rate. The
marginal propensity to consume is 0.75. What is the
income-expenditure multiplier? A 0.25 B 0.75
C 4.00 D 0.57 E 1.33 8. In general, an increase in government
spending will: A. Increase output. B. Reduce interest rates. C.
Reduce the participation rate. D. Increase interest rates. E A and
D.
9. An increase in the reserve requirement of banks will: A.
Increase the demand for high-powered money. B. Reduce the supply of
high-powered money C. Reduce the demand for high-powered money. D.
Reduce interest rates. E. C and D. 10. An example of when the IS
curve shifts to the left is: A. A reduction in government spending.
B. An increase in the money supply. C. An increase in the interest
rate. D. An increase in government spending. E. C and D. 11. An
example of when the LM curve shifts to the right is: A. A reduction
in government spending. B. An increase in the money supply. C. An
increase in investment spending. D. A fall in the interest rate. E.
C and D. 12. The IS curve is downward-sloping because: A. Increased
taxes lead to a lower level of output. B. Higher output can only be
sold if the interest rate falls. B. The government raises interest
rates when output falls. C. The government budget must always
balance. D. Net exports are zero. 13. The LM curve is
upward-sloping because: A. Increased output requires an increase in
the money supply. B. Wealthier people prefer to hold bonds. C. With
a fixed money supply, an increase in income
requires an increase in the interest rate to keep total money
demand the same. D. The money multiplier is greater than one. E. C
and D.
