midterm 1

Which of the following will cause a shift of the IS curve

ECON 102

SPRING 2007- 1ST MIDTERM

1) Which of the following will cause a shift of the IS curve?

a) an increase in taxes

b) an increase in government spending

c) an increase in consumer confidence

d) all of the above

e) none of the above

2) Which of the following will cause a shift in the LM curve?

a) an open market purchase of bonds

b) an increase in consumer confidence

c) a reduction in taxes

d) an increase in output

e) all of the above

3) Which of the following will occur if there is a reduction in consumer confidence?

a) The LM curve will shift rightward.b) The IS curve will shift rightward.

c) The IS curve will shift leftward.

d) The LM curve will shift leftward.e) The IS curve will shift leftward LM curve will rightward4) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the 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) Investment spending will decrease.

c) Output will increase

d) Investment spending may increase, decrease, or not change


5) Suppose the demand for money is NOT very sensitive to the income. Given this information, we know that

a) the LM curve should be relatively flat

b) neither the IS nor the LM curve will be affected

c) the IS curve should be relatively flat.

d) the IS curve should be relatively steep

e) the LM curve should be relatively steep.

6) Suppose there is a reduction in consumer confidence. Which of the following best represents the list of variables that must decrease in response to this decline in consumer confidence?

a) consumption and investmentb) consumption, investment and output

c) output and investment d) consumption and taxes e) consumption, and interest rate7) For this question, assume that investment spending depends only on the interest rate and does not depend on output. Given this information, a reduction in the money supply

a) will have no effect on output

b) will cause investment to increase

c) may cause investment to increase or to decrease

d) will cause investment to decrease

e) will cause a reduction in output and have no effect on the interest rate.

8) An increase in the money supply must cause which of the following?

(a) a leftward shift in the IS curve(b) no change in the interest rate if investment is independent of the interest rate

(c) no change in output if investment is independent of the interest rate

(d) an increase in investment and a rightward shift in the IS curve

(e) none of the above

9) For this question, assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in the money supply

a) will have no effect on output or the interest rate.

b) will cause a reduction in the interest rate.

c) will cause investment to increase.

d) will cause an increase in output and have no effect on the interest rate.

e) will cause investment to decrease.

10) A reduction in the aggregate price level, P, will most likely have which of the following effects?

a) a rightward shift in the IS curve

b) a leftward shift in the IS curve

c) an rightward shift in the LM curve

d) a leftward shift in the LM curve

e) none of the above11) Which of the following is NOT a characteristic of bonds?

a) pay zero interest

b) are sold for a price that varies inversely with the interest rate

c) cannot be used for transactions

d) all of the above


12) We know that the amount of money that individuals want to hold

a) will increase as the interest rate increases

b) increases as income decreases

c) decreases as the interest rate increases

d) is independent of income and interest rate


13) Which of the following will cause a leftward shift in the money demand curve?

a) an open market sale of bonds by the central bank

b) an increase in the interest rate

c) a reduction in income d) a reduction in the interest rate


14) Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bond's price must be:

a) $1150

b) $850c) $869.56

d) $950


15) For this question, assume that individuals do NOT hold currency (i.e., c = 0). If the ratio of reserves to deposits is 0.20, the money multiplier is:

a) 0.2

b) 1c) 5

d) none of the above

e) Given information is not enough16) Which of the following will cause a reduction in the money multiplier?

a) a reduction in monetary baseb) an increase in the ratio of reserves to checkable deposits

c) an increase in monetary based) an increase in publics preferences for checking deposits as opposed to holding currency


17) Which of the following events will cause the interest rate to increase?

a) an increase in income

b) an open market sale of bonds

c) an increase in the reserve deposit ratio (q)d) all of the above


18) We would expect which of the following to occur when the central bank pursues expansionary monetary policy?

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

d) a reduction in bond prices and a reduction in i


19) We would expect which of the following to occur when the central bank conducts an open market purchase of bonds?

a) an increase in the money multiplier

b) a reduction in the monetary base (H)

c) an increase in H

d) a reduction in the money multiplier

e) both C and D

20) An increase in the reserve ratio, q, will cause:

a) an increase in the money multiplier

b) an increase in the monetary base (H)

c) a reduction in the money multiplier

d) a reduction in H

e) none of the above 21) Disposable income equals:

a) consumption minus taxes.

b) income minus government spendingc) the sum of consumption and savingd) income minus both saving and taxes


22) Suppose the consumption equation is represented by the following: C = 500 + 0.8YD. Given this information, the marginal propensity to save is:

a) 0.2

b) 0.8c) 5

d) Given information is not enough


23) We know that a reduction in the desire to save will cause:

a) a reduction in GDP

b) no change in equilibrium GDP

c) a reduction in the interest rated) an increase in equilibrium GDP

e) an increase in the desire to invest.

24) Suppose C = 100 + .8YD. How much of an increase in government spending must occur for equilibrium output to increase by 1000?

a) 100

b) 200

c) 500

d) 1000

e) Given information is not enough

25) A reduction in the marginal propensity to save from 0.4 to 0.3 will cause:

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 steeper 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 larger effect on output.

d) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output


26) Based on IS-LM model we know that an increase in taxes will cause:

a) a reduction in investment

b) no change in investment

c) no change in consumption

d) an increase in investment

e) none of the above.

27) During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we know with certainty that

a) real GDP did not change during these periods

b) real GDP fell during these periods

c) both real GDP and the overall price level decreased during these periods

d) the overall price level in Japan decreased during these periods

e) Japanese business owners are worse off

Questions 28-29 are based on the following information. Robinson Crusoe (RC) and Friday are the only inhabitants of Dream-Island. Consider the following series of transactions:

1. Friday catches 250 kg of fish and sells them to RC for 2000

2. RC uses the fish to make fish oil, which he sells to Friday for 25003. Friday uses the fish oil to make hand lotion, which he sells for 4500

28) Suppose these are the only transactions in Dream-Island , and that all of them take place in the year 2006. GDP in Dream-Island in 2006 is:

(f) 2000

(g) 2500

(h) 4500(i) 9000(j) none of the above29) Alternatively, suppose again that these transactions are the only ones in Dream-Island, but the first transaction takes place in 2006, while transactions 2 and 3 take place in 2007. GDP in Dream-Island in 2006 and 2007 respectively is:a) 2000 and 2500b) 2000 and 4500c) 2000 and 7000d) 0 and 4500e) None of the above30) Suppose again Friday sells 250 kg of fish to RC in 2006 for 2000 YTL. In 2007 RC imports some exotic flavors for 250 YTL from REALDream-Island, a neighboring island. Using these flavors RC makes a higher quality fish oil and sells to Friday for 2750 YTL. (in 2007) Using this fish oil Friday makes hand lotion and sells it to RC for 4750 YTL. (in 2007). GDP in Dream-Island in 2006 and 2007 respectively is:

a) 2000 and 2500

b) 2000 and 4750c) 2000 and 2750d) 0 and 4750e) None of the above

Questions 31-34 are based on the following: Consider a country in which there are just three goods: houses, cars, and potatoes. The only new, domestically produced final goods are houses and cars. Potatoes are imported from a neighbor country. However, all three goods are consumed by the typical urban consumer. Listed below are the prices and quantities of these goods in the base year and in the current year.

Base YearCurrent Year

HousesPrice1015

Quantity510

CarsPrice55

Quantity2025

PotatoesPrice10.75

Quantity100100

31) According to GDP deflator price level in the base year was:

a) 0,818

b) 0.928c) 1

d) 1.076e) 1.22232) According to GDP deflator the price level in the current year is:

a) 0,818

b) 0.928

c) 1

d) 1.076

e) 1.222

33) Real GDP in the current year is

a) 200

b) 225

c) 300

d) 400


34) Real GDP growth rate is:a) 83%

b) 50%c) 20%

d) 30%

e) None of the above

Questions 35-36 are based on the following

C = 1000 + .6YD

I = 600

G = 2000

T = 1000

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

a) 2600b) 3750

c) 4600

d) 7500


36) Suppose taxes decrease by 250 for the above economy. Given the above information, we know that equilibrium output will decrease by:

a) 250

b) 375

c) It will not decrease but increase by 375.

d) It will not decrease but increase by 250.


37) If marginal propensity to consume is 0,6 which one is going to cause the largest decline in private consumption? (k) 300 YTL decline in I

(l) 350 YTL increase in T

(m) 300 YTL decline in G

(n) Both (a) and (c)

(o) None of the above

38) If a Turkish citizen buys a television made in Korea by a Korean firm,

(p) Turkish GDP decreases.

(q) Turkish GDP increases.

(r) Turkish GDP is unaffected.

(s) Turkish GDP deflator rises(t) None of the above.

39) Employing Figure 1.1, equilibrium output is ____________, and the marginal propensity to save is ____________.

a) 200; 0.40b) 500; 0.40c) 200; 0.60

d) 500;0.60

e) None of the above

Figure 1.1

40) A change in the interest rate will generally affect the

a) level of investment.

b) level of consumption.

c) money supply

d) All of these.

e) Both (a) and (b)

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midterm 1