Assignment 2

Question 1

What is the meaning of a “closed economy”?

Answer 1

There is no imports or exports

Question 2

Disposable income equals ____

Answer 2

The sum of consumption and saving

Question 3

The marginal propensity to consume represents

Answer 3

The change in consumption caused by a one-unit change in disposable income

Question 4

Suppose the consumption is represented by the following: C = 250 + 0.75Yd. The multiplier in this economy is ___

Answer 4

4

multiplier = 1/(1-b), b = 0,75

Question 5

Suppose the consumption equation is represented by the following: C = 250 + 0.75Yd. The marginal propensity to save is ____

Answer 5

0.25

marginal propensity = 1-b, b= 0.75

Question 6

What increase the equilibrium output in the short run?

Answer 6

Increase in investment demand
Increase in costumer confidence
Increase in government spending
Decrease in taxes

Question 7

What is the equation equals demand in a open economy?

Answer 7

C + I + G + X - IM

Question 8

Autonomous spending in a closed economy equals what equation?

Answer 8

c0 + I + G - c1T

Question 9

An increase in c1 (where C = c0 + c1Yd from Chapter 3) will cause ____

Answer 9

The ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output

Question 10

Import in a closed economy is represented by which equation

Answer 10

I = S + (T-G)

Question 11

An increase in the desire to save by households will cause ____

Answer 11

A reduction in output

Question 12

Of the models presented in Chapter 3, we know that an equal and simultaneous reduction in G and T will cause ____

Answer 12

a reduction in output

Question 13

What are the components of money?

Answer 13

Checkable deposits
Coins held by the nonbank public
Bills held by banks

Question 14

What effects the demand for money?

Answer 14

Interest rate
Nominal income
Prices

Question 15

What generally occurs when a central bank pursues expansionary monetary policy?

Answer 15

The central bank purchases bonds and the interest rate decreases

Question 16

What generally occurs when a central bank pursues contractionary monetary policy?

Answer 16

The central bank sells bonds and the interest rate increases

Question 17

What will occur when an economy is faced with a liquidity trap?

Answer 17

The aggregate demand curve is now vertical

Question 18

When a liquidity trap situation exists, the most appropriate policy to increase output would be ____

Answer 18

Increase in government spending (G)

Question 19

When there is an increase in government spending the IS curve will ____

Answer 19

Shift to the right

Question 20

An increase in the interest rate causes investment spending to decrease, the IS curve will ___

Answer 20

Move leftward

Question 21

Suppose policy makers decide to reduce taxes. The IS curve ____ and the economy ____ the LM curve

Answer 21

shifts, move along

Question 22

Suppose investment spending is NOT very sensitive to the interest rate, then we know that the IS curve should be ______

Answer 22

relatively steep

Question 23

Suppose the demand for money is NOT very sensitive to the interest rate, then we know that the LM curve ______

Answer 23

remain horizontal

Question 24

An increase in costumer confidence will tend to cause _____ in the IS curve

Answer 24

a rightward shift

Question 25

Assume that investment does NOT depend on the interest rate. A reduction in the money supply will cause ______ output

Answer 25

no change

Question 26

An increase in the aggregate price level P, will most likely make the ___ curve shift ____

Answer 26

LM, upward

Question 27

The IS curve will NOT shift when there is a ______

Answer 27

reduction in the interest rate

Question 28

An increase in government spending will most likely make the ___ curve shift ____

Answer 28

IS, rightward

Question 29

If government spending and taxes increases by the same amount. The IS curve shifts ___

Answer 29

rightward

Question 30

What occurs when the economy moves rightward along a given IS curve?

Answer 30

A reduction in the interest rate causes investment spending to increase