Exercise 2 (Chapters 3-4) essay questions



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Izmir University of Economics

Department of Economics

Econ 202

Spring 2013




Exercise 2 (Chapters 3-4)


ESSAY QUESTIONS

1)



Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300

YD = Y - T G = 2000


a. Given the above variables, calculate the equilibrium level of output. Hint: First specify (using the above numbers) the demand equation (Z) for this economy. Second, using the equilibrium condition, equate this expression with Y. Once you have done this, solve for the equilibrium level of output. Using the ZZ-Y graph (i.e., a graph that includes the ZZ line and 45-degree line with Z on the vertical axis, and Y on the horizontal axis), illustrate the equilibrium level of output for this economy.

b. Now, assume that consumer confidence decreases causing a reduction in autonomous consumption (c0) from 500 to 400. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

c. Graphically illustrate the effects of this change in autonomous consumption on the demand line (ZZ) and Y. Clearly indicate in your graph the initial and final equilibrium levels of output.

d. Briefly explain why this reduction in output is greater than (in absolute terms) the initial reduction in autonomous consumption.


2)



Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier.


3)



First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.


4)



What is the money multiplier and what factors determine its size?



5)



Graphically illustrate and explain what effect a sale of bonds by the Federal Reserve will have on the money market.


6)



The demand for money is given by Md = $Y (0.3-i), where $Y = 100 and the supply of money is $20.

a. What is the equilibrium interest rate?



b. What is the impact on the interest rate if central bank money is increased to $25?



MULTIPLE CHOICE QUESTIONS

7)



Which of the following would NOT be considered part of fixed investment spending (I)?



A)



Apple computer builds a new factory.

B)



Exxon increases its inventories of unsold gasoline.

C)



Toyota buys a new robot for its automobile assembly line.

D)



An accountant buys a newly built home for herself and her family.

E)



all of the above


8)



Which of the following is an endogenous variable in our model of the goods market in Chapter 3?


A)



disposable income (YD)

B)



total income (Y)

C)



consumption (C)

D)



saving (S)

E)



all of the above


9)



An economy is in equilibrium when which of the following conditions is satisfied?

A)



total saving equals investment

B)



output equals consumption

C)



total saving equals zero

D)



consumption equals saving

E)



all of the above


10)



Based on our understanding of the model presented in Chapter 3, we know that an increase in c1 (where C = c0 + c1YD) will cause


A)



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

D)



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


11)



If C = 2000 + .9YD, what increase in government spending must occur for equilibrium output to increase by 1000?


A)



100

B)


250

C)


1000

D)


200

E)


500


12)



Which of the following is a flow variable?



A)



financial wealth

B)



money

C)



income

D)



all of the above

E)



none of the above


13)



Which of the following is an asset for both a bank and a central bank?



A)



deposits

B)



bonds

C)



currency

D)



all of the above

E)



none of the above


14)



Suppose a one-year discount bond offers to pay $100 in one year and currently sells for $99. Given this

information, we know that the interest rate on the bond is





A)



5.3%.

B)


9.9%.

C)


10%.

D)


11.1%.


15)



If individuals do not hold checkable deposits, we know that


A)



H = CU.

B)


M = CU.

C)



the money multiplier is 1.

D)


all of the above


16)



A reduction in the reserve ratio, θ, will cause

A)



a reduction in the money multiplier.

B)



a reduction in H and a reduction in the money multiplier.

C)



an increase in the monetary base (H).

D)



an increase in the money multiplier.


17)



At the current interest rate, suppose the supply of money is less than the demand for money. Given this information, we know that


A)



production equals demand.

B)



the price of bonds will tend to fall.

C)



the price of bonds will tend increase.

D)



the goods market is also in equilibrium.

E)



the supply of bonds also equals the demand for bonds.


18)



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

A)



an increase in the reserve deposit ratio (i.e., θ)

B)



an increase in income

C)



an open market sale of bonds

D)



all of the above



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