Lecture 11

Question 1

Refer to Figure 25-3. The equilibrium interest rate in this market is ________% and the equilibrium flow of investment and saving is ________ billion dollars.

A) 3; 70

B) 2; 60

C) 1; 50

D) 5; 90

E) 4; 80

Answer 1

A

Question 2

Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess ________ financial capital of ________ billion dollars.

A) supply of; 30

B) demand for; 30

C) demand for; 60

D) demand for; -60

E) supply of; 90

Answer 2

A

Question 3

Refer to Table 25-2. What is the level of public saving for this economy?

A) -$50

B) $150

C) -$200

D) $200

E) -$150

Answer 3

E

Question 4

Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries

A) with the highest levels of GDP.

B) with a negative relationship between investment and the rate of economic growth.

C) with the highest levels of per capita GDP.

D) with high rates of economic growth.

E) with the lowest rate of national saving.

Answer 4

D

Question 5

An important automatic fiscal stabilizer in Canada is

A) the exchange rate.

B) the marginal propensity to consume.

C) the marginal propensity to import.

D) the income-tax system.

E) government purchases of goods and services.

Answer 5

D

Question 6

Refer to Table 25-2. What is the level of private saving for this economy?

A) $100

B) $450

C) $400

D) $150

E) $50

Answer 6

C

Question 7

The “paradox of thrift” refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession.

A) increase; shorter

B) decrease; more severe

C) decrease; less severe

D) increase; more severe

E) increase; less severe

Answer 7

D

Question 8

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output?

A) The growth rate of potential output may be reduced due to the crowding out of private investment.

B) The growth rate of potential output will rise due to the higher level of aggregate demand.

C) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.

D) Potential output will drop below its starting point because of the crowding out of investment.

E) The level of potential output is fixed and will not be affected by fiscal policy.

Answer 8

A

Question 9

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the

A) AD to the left to intersect AS at point A.

B) potential GDP and the AS curve to the left.

C) AD curve to the right.

D) AS curve to the left to intersect AD at C.

E) AS curve to the right.

Answer 9

A

Question 10

Consider the market for financial capital in the long run. The investment demand curve is downward sloping because

A) all components of desired investment are negatively related to the real interest rate.

B) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital.

C) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital.

D) an increase in the real interest rate leads to an increase in investment demand.

E) all components of desired investment are positively related to the real interest rate.

Answer 10

A

Question 11

Suppose the government has a budget surplus of $2 billion. If the country’s level of private saving is $1.2 billion, then national saving must be

A) -$1.2 billion.

B) $3.2 billion

C) -$800 million.

D) $800 million

E) $0.

Answer 11

B

Question 12

Refer to Table 25-2. What is the level of national saving for this economy?

A) -$50

B) -$200

C) -$150

D) $150

E) $250

Answer 12

E

Question 13

Consider the long-run theory of investment, saving and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where

A) desired saving equals desired consumption.

B) the nominal price level equals the real price level.

C) aggregate demand equals aggregate expenditure.

D) desired consumption equals desired investment.

E) desired national saving equals desired investment.

Answer 13

E

Question 14

One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that

A) inflation will not be as stimulated.

B) the recovery will be slower, thereby causing less disruption.

C) the recovery may be more rapid.

D) price level will rise higher than otherwise.

E) the economy will overshoot potential GDP and a boom will be underway.

Answer 14

C

Question 15

Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate

A) leads households to increase their current consumption.

B) decreases the supply of public saving.

C) leads to an increase in investment demand.

D) leads households to reduce their current consumption.

E) decreases the supply of private saving.

Answer 15

D

Question 16

Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result is intended to be

A) that the AS curve will shift to the right until point A is reached.

B) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0.

C) no change in either price level or output, since expansionary fiscal policy is ineffective.

D) that the AD curve will shift to the right until point B is reached.

E) that the AS curve and the AD curve will shift left simultaneously.

Answer 16

D

Question 17

Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy’s natural adjustment process to operate is that

A) it will reduce the upward pressure on the price level that would otherwise occur.

B) if private-sector expenditures increase on their own, the policy will stabilize real GDP.

C) it will shorten what might otherwise be a long recession.

D) it will reduce the downward pressure on the price level that would otherwise occur.

E) it will close the output gap.

Answer 17

A

Question 18

Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 2%. In this case there is an excess ________ financial capital of ________ billion dollars.

A) supply of; 50

B) demand for; 80

C) demand for; -30

D) demand for; 30

E) supply of; 30

Answer 18

D

Question 19

Which of the following equations is a correct expression for national saving in the long run when real GDP equals potential output?

A) NS = T - G - C

B) NS = Y* - C + T - G

C) NS = Y* - C - G

D) NS = Y* - T - C

E) NS = T - G

Answer 19

C

Question 20

Fiscal policy refers to the

A) government’s use of spending and taxing policies to influence equilibrium real GDP.

B) government’s use of trade-related policy tools to influence the net export function, thereby influencing GDP.

C) government’s attempts to maintain a vertical AS curve so as to stabilize output.

D) households’ attempts to change saving to encourage growth.

E) business sector’s influence on investment and GDP.

Answer 20

A

Question 21

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of

A) a decision lag.

B) automatic fiscal stabilizers.

C) gross tuning.

D) fine tuning.

E) an execution lag.

Answer 21

A