1. Which of the following is FALSE?
B) Indian GDP underestimates actual economic activity because it does not include
underground activity
C) an increase in the ratio of currency holdings to bank deposits may be seen as evidence for
an increase in underground activity
D) if the underground economy grows rapidly, then the rate of economic growth will be
underestimated
E) as the underground economy grows, consumption spending decreases
F) underground activity includes income from services produced at home but not reported,
such as typing someone else's term paper
Ans: D
2. In 1994, U.S. GDP was $6,931, GNP was $6,922, NNP was $6,104, and national income
was $5,495 (all numbers are in billions of dollars). We can conclude that
A) depreciation was $818 billion
B) depreciation was $1,436 billion
C) the addition to the capital stock was $1,436 billion
D) the addition to the capital stock was $1,427 billion
E) indirect business taxes were $9 billion
Ans: A
3.Which of the following identities is FALSE?
A) Y C + I + G + NX
B) YD Y - TA + TR
C) BS TA - TR - G
D) I - S (G - TA + TR) + NX
E) S + TA - TR I + G + NX
Ans: D
4. In the Keynesian aggregate supply curve case,
A) firms will always supply the amount of goods demanded at the existing price level
B) consumers will demand whatever is supplied by firms at each price
C) the economy is always at full employment
D) unemployment is always at its natural rate
E) none of the above
Ans: A
5.A shift of the AD-curve to the left can be caused by
A) a decrease in taxes
B) an increase in business and consumer confidence
C) an increase in nominal money supply
D) a decrease in government transfer payments
E) a decrease in money demand
Ans: D
6. Assume a simple model without any government. If an increase in autonomous investment
of 40 leads to an increase in consumption of 160, then the marginal propensity to save is
A) 0.10
B) 0.20
C) 0.25
D) 0.40
E) 0.80
Ans: B
7. The expenditure multiplier measures
A) the number of steps it takes to move from one equilibrium to another
B) the rise in saving resulting from a rise in income
C) the change in investment resulting from a change in income
D) the change in induced consumption caused by a change in income
E) none of the above
Ans: E
8. Assume a model with no government or foreign sector. If national income is Y = 800,
autonomous consumption is Co = 100, and the marginal propensity to consume is c = 0.7,
then total consumption is
A) 100
B) 560
C) 660
D) 700
E) 800
Ans: C
9. A decrease in the income tax rate would imply the following:
A) a decrease in saving
B) a decrease in government spending
C) a decrease in government transfer payments
D) an increase in the expenditure multiplier
E) all of the above
Ans: D
10.If the consumption function is defined as C = 800 + (0.75)YD, the marginal income tax
rate is t = 0.5, and autonomous investment decreases by 50, then the budget surplus will
A) remain unaffected
B) decrease by 100
C) decrease by 80
D) decrease by 40
E) decrease by 10
Ans: D
11. Looking at the behavior of interest rates over time, we realize that
A) they tend to fall before a recession
B) they tend to be high before a recession and fall during a recession
C) they tend to rise in a recovery and fall in a recession
D) they tend to be high in a recession
E) both B) and C)
Ans: E
12. We can expect the IS-curve to become flatter as
A) the supply of money decreases
B) the marginal propensity to consume decreases
C) the income tax rate increases
D) investment becomes more sensitive to interest rate changes
E) money demand becomes more sensitive to interest rate changes
Ans: D
