Question 1

If government expenditure rises by $54 billion and the multiplier in the economy is 1.5, then real GDP_____, and the IS curve shifts to the_____.

Accepted Answer

A) rises by $81 billion; right 
B) rises by $36 billion; right 
C) falls by $36 billion; left 
D) falls by $54 billion; left 
A) rises by $81 billion; right 
B) rises by $36 billion; right 
C) falls by $36 billion; left 
D) falls by $54 billion; left

Question 2

You spend $45 on a haircut, $30 on a couple of T-shirts, and $17 on lunch at a restaurant. In which component of aggregate expenditure are these expenditures included?

Accepted Answer

A) consumption 
B) planned investment 
C) government expenditure 
D) exports 
A) consumption 
B) planned investment 
C) government expenditure 
D) exports

Question 3

Suppose the economy is currently producing 4% below potential GDP. The government increases spending by $5 trillion, and this causes GDP to rise by $15 trillion. The economy then arrives at potential GDP. Using this information, answer the following questions.
(a) What is the multiplier in the economy?
(b) What effect will be seen on the IS-MP framework?

Accepted Answer

The answer of Suppose the economy is currently producing 4%...

Question 4

If the local cookie factory purchases a new energy efficient industrial oven, this expenditure is:

Accepted Answer

A) consumption. 
B) planned investment. 
C) government expenditure. 
D) exports. 
A) consumption. 
B) planned investment. 
C) government expenditure. 
D) exports.

Question 5

If the nominal rate of interest is 4.8%, the rate of inflation is 2%, and the risk premium is 0.75%, the MP curve is at:

Accepted Answer

A) 3.55%. 
B) 2.05%. 
C) 2.8%. 
D) 4.05%. 
A) 3.55%. 
B) 2.05%. 
C) 2.8%. 
D) 4.05%.

Question 6

The Kenyan government constructs a new intercity highway. As a result:

Accepted Answer

A) there is a movement down and to the right along the IS curve. 
B) there is a movement up and to the left along the IS curve. 
C) the IS curve shifts to the right. 
D) the IS curve shifts to the left. 
A) there is a movement down and to the right along the IS curve. 
B) there is a movement up and to the left along the IS curve. 
C) the IS curve shifts to the right. 
D) the IS curve shifts to the left.

Question 7

Using the following data, calculate the aggregate expenditure in the economy.
 $$\begin{array} { | l | l | } 
\hline \text { Consumption } & \$ 6.67 \text { trillion } \
\hline \text { Investment } & \$ 4.35 \text { trillion } \
\hline \text { Government spending } & \$ 3.20 \text { trillion } \
\hline \text { Exports } & \$ 3.15 \text { trillion } \
\hline \text { Imports } & \$ 2.75 \text { trillion } \
\hline
\end{array}$$

Accepted Answer

The answer of Using the following data, calculate the aggregate...

Question 8

If Y < AE:

Accepted Answer

A) there will be a build-up of inventories in the economy. 
B) the stock of inventories will fall in the economy. 
C) managers will respond by lowering production. 
D) the economy must be producing less than potential GDP. 
A) there will be a build-up of inventories in the economy. 
B) the stock of inventories will fall in the economy. 
C) managers will respond by lowering production. 
D) the economy must be producing less than potential GDP.

Question 9

For each of the following cases, determine the appropriate fiscal policy response.
(a) There is a negative output gap.
(b) There is a positive output gap.

Accepted Answer

The answer of For each of the following cases, determine...

Question 10

Which of the following shows the correct effect on the IS curve of a decrease in the real interest rate?

Accepted Answer

A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point D to point C 
A) a movement from point A to point D 
B) a movement from point A to point B 
C) a movement from point C to point B 
D) a movement from point D to point C

Question 11

Using the following data, calculate the aggregate expenditure in the economy.
 $$\begin{array} { | l | l | } 
\hline \text { Consumption } & \$ 7.21 \text { trillion } \
\hline \text { Investment } & \$ 5.17 \text { trillion } \
\hline \text { Government spending } & \$ 4.20 \text { trillion } \
\hline \text { Exports } & \$ 2.15 \text { trillion } \
\hline \text { Imports } & \$ 2.50 \text { trillion } \
\hline
\end{array}$$

Accepted Answer

The answer of Using the following data, calculate the aggregate...

Question 12

For each of the following cases, draw an MP curve to show how each of the factors affects the MP curve.
(a) Default rates on bank loans increase.
(b) The Federal Reserve raises the federal funds rate.
(c) The Federal Reserve lowers the federal funds rate.

Accepted Answer

The answer of For each of the following cases, draw...

Question 13

Which of the following shows the correct effect on the IS-MP framework if there is a sharp increase in loan default rates in an economy?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 14

The higher the opportunity cost of consumption, the:

Accepted Answer

A) higher the investment in the economy. 
B) higher the consumption. 
C) lower the aggregate expenditures. 
D) more to the right the economy is along the IS curve. 
A) higher the investment in the economy. 
B) higher the consumption. 
C) lower the aggregate expenditures. 
D) more to the right the economy is along the IS curve.

Question 15

If the multiplier in the economy is 2.4 and government spending rises by $1.5 trillion, then GDP will change by about:

Accepted Answer

A) $1.5 trillion. 
B) $3.6 trillion. 
C) $1.6 trillion. 
D) $2.4 trillion. 
A) $1.5 trillion. 
B) $3.6 trillion. 
C) $1.6 trillion. 
D) $2.4 trillion.

Question 16

The MP curve is the:

Accepted Answer

A) current discount rate set by Fed. 
B) current real interest rate as determined by monetary policy and the risk premium. 
C) relationship between the real interest rate and real GDP. 
D) relationship between the real interest rate and the exchange rate. 
A) current discount rate set by Fed. 
B) current real interest rate as determined by monetary policy and the risk premium. 
C) relationship between the real interest rate and real GDP. 
D) relationship between the real interest rate and the exchange rate.

Question 17

How do interest rates affect investment in the economy?

Accepted Answer

A) Lower interest rates lower the cost of borrowing for firms, and so investment rises. 
B) Lower interest rates lower the after-tax profit for firms, and thus investment falls. 
C) Higher interest rates lower the cost of borrowing for firms, and so firms save more in banks. 
D) Higher interest rates increase government expenditure and thus raise investment. 
A) Lower interest rates lower the cost of borrowing for firms, and so investment rises. 
B) Lower interest rates lower the after-tax profit for firms, and thus investment falls. 
C) Higher interest rates lower the cost of borrowing for firms, and so firms save more in banks. 
D) Higher interest rates increase government expenditure and thus raise investment.

Question 18

The output gap is positive when:

Accepted Answer

A) monetary policy actions exceed fiscal policy actions. 
B) actual GDP surpasses potential GDP. 
C) actual GDP is lower than potential GDP. 
D) potential GDP meets actual GDP. 
A) monetary policy actions exceed fiscal policy actions. 
B) actual GDP surpasses potential GDP. 
C) actual GDP is lower than potential GDP. 
D) potential GDP meets actual GDP.

Question 19

Which of the following changes could create a more positive output gap?
(i) The U.S. dollar appreciates.
(ii) The U.S. dollar depreciates.
(iii) Trading partners reduce tariffs on U.S. exports.
(iv) Monetary policy actions boost the economy.

Accepted Answer

A) (i) only 
B) (ii) only 
C) (ii), (iii), and (iv) 
D) (iv) only 
A) (i) only 
B) (ii) only 
C) (ii), (iii), and (iv) 
D) (iv) only

Question 20

Which of the figures correctly represents the shape of the IS curve?

Accepted Answer

A) Figure A 
B) Figure B 
C) Figure C 
D) Figure D 
A) Figure A 
B) Figure B 
C) Figure C 
D) Figure D

Exam 30: IS-MP Analysis: Interest Rates and Output

If government expenditure rises by $54 billion and the multiplier in the economy is 1.5, then real GDP_____, and the IS curve shifts to the_____.

You spend $45 on a haircut, $30 on a couple of T-shirts, and $17 on lunch at a restaurant. In which component of aggregate expenditure are these expenditures included?

If the local cookie factory purchases a new energy efficient industrial oven, this expenditure is:

If the nominal rate of interest is 4.8%, the rate of inflation is 2%, and the risk premium is 0.75%, the MP curve is at:

The Kenyan government constructs a new intercity highway. As a result:

Using the following data, calculate the aggregate expenditure in the economy. Consumption \ 6.67 trillion Investment \ 4.35 trillion Government spending \ 3.20 trillion Exports \ 3.15 trillion Imports \ 2.75 trillion

If Y < AE:

For each of the following cases, determine the appropriate fiscal policy response. (a) There is a negative output gap. (b) There is a positive output gap.

Which of the following shows the correct effect on the IS curve of a decrease in the real interest rate?

Using the following data, calculate the aggregate expenditure in the economy. Consumption \ 7.21 trillion Investment \ 5.17 trillion Government spending \ 4.20 trillion Exports \ 2.15 trillion Imports \ 2.50 trillion

For each of the following cases, draw an MP curve to show how each of the factors affects the MP curve. (a) Default rates on bank loans increase. (b) The Federal Reserve raises the federal funds rate. (c) The Federal Reserve lowers the federal funds rate.

Which of the following shows the correct effect on the IS-MP framework if there is a sharp increase in loan default rates in an economy?

The higher the opportunity cost of consumption, the:

If the multiplier in the economy is 2.4 and government spending rises by $1.5 trillion, then GDP will change by about:

The MP curve is the:

How do interest rates affect investment in the economy?

The output gap is positive when:

Which of the following changes could create a more positive output gap? (i) The U.S. dollar appreciates. (ii) The U.S. dollar depreciates. (iii) Trading partners reduce tariffs on U.S. exports. (iv) Monetary policy actions boost the economy.

Which of the figures correctly represents the shape of the IS curve?

The Core Principles of Economics

Demand: Thinking Like a Buyer

Supply: Thinking Like a Seller

Equilibrium: Where Supply Meets Demand

Elasticity: Measuring Responsiveness

When Governments Intervene in Markets

Welfare and Efficiency

Gains From Trade

International Trade

Externalities and Public Goods

Labor Demand and Supply

Wages, Workers, and Management

Inequality, Social Insurance, and Redistribution

Market Structure and Market Power

Entry, Exit, and Long-Run Profitability

Business Strategy

Sophisticated Pricing Strategies

Game Theory and Strategic Choices

Decisions Involving Uncertainty

Decisions With Private Information

Sizing up the Economy Using Gdp

Economic Growth

Unemployment

Inflation and Money

Consumption and Saving

Investment

The Financial Sector

International Finance and the Exchange Rate

Business Cycles

Phillips Curve

The Fed Model: Linking Interest Rates, Output, and Inflation

Aggregate Demand and Aggregate Supply

Monetary Policy

Government Spending, Taxes, and Fiscal Policy

Appendix: Aggregate Expenditure and the Multiplier

Filters

If government expenditure rises by $54 billion and the multiplier in the economy is 1.5, then real GDP_, and the IS curve shifts to the_.