Tutorial 5 2024 summer exam format

Question 1

Which of the following is NOT a component of GDP according to the expenditure approach?
a. Consumption
b. Investment
c. Government spending
d. Net exports

Answer 1

d. Net exports

Question 2

Countercyclical fiscal policy involves:
a. Increasing government spending during a recession and reducing it during an expansion.
b. Increasing interest rates during a recession and lowering them during an expansion.
c. Reducing taxes during an expansion and increasing them during a recession.
d. Keeping government spending and taxation constant throughout the business cycle.

Answer 2

a. Increasing government spending during a recession and reducing it during an expansion.

Question 3

In the IS/LM model, the effectiveness of monetary policy is determined by:
a. The slope of the IS curve and the level of government spending.
b. The responsiveness of money demand to changes in interest rates and the slope of the LM curve.
c. The level of investment and the state of the foreign exchange market.
d. The rate of inflation and the level of aggregate demand.

Answer 3

b. The responsiveness of money demand to changes in interest rates and the slope of the LM curve.

Question 4

Points off the LM curve represent:
a. Positions where the money market is in equilibrium.
b. Positions of excess demand for money or excess supply of money.
c. Points where the goods market is in equilibrium.
d. Points where the government budget is balanced.

Answer 4

b. Positions of excess demand for money or excess supply of money.

Question 5

An exogenous variable is:
a. A variable determined within the model.
b. A variable determined outside the model.
c. A variable that changes based on the level of output.
d. A variable that is constant over time.

Answer 5

b. A variable determined outside the model.

Question 6

Automatic stabilisers are:
a. Government policies that are enacted in response to economic fluctuations.
b. Financial instruments used to stabilize currency values.
c. Economic policies that automatically adjust with economic conditions, such as progressive taxes and unemployment benefits.
d. Central bank interventions that adjust the money supply.

Answer 6

c. Economic policies that automatically adjust with economic conditions, such as progressive taxes and unemployment benefits.

Question 7

Which of the following describes a key difference between the Classical and Keynesian schools of economics?
a. Classical economics focuses on short-run fluctuations, while Keynesian economics focuses on long-run equilibrium.
b. Classical economics emphasizes the role of government intervention, while Keynesian economics emphasizes market self-adjustment.
c. Classical economics assumes prices are flexible, while Keynesian economics assumes prices are sticky in the short run.
d. Classical economics advocates for fiscal policy, while Keynesian economics advocates for monetary policy.

Answer 7

c. Classical economics assumes prices are flexible, while Keynesian economics assumes prices are sticky in the short run.

Question 8

Investment expenditure in the Keynesian income-spending model is:
a. Considered autonomous and shifts the IS curve.
b. Influenced by interest rates and shifts the LM curve.
c. Affected by changes in government spending and taxes.
d. Determined by changes in the money supply and inflation.

Answer 8

a. Considered autonomous and shifts the IS curve.

Question 9

In the IS/LM model, an increase in public spending will:
a. Shift the IS curve to the left and increase interest rates.
b. Shift the IS curve to the right and increase interest rates.
c. Shift the LM curve to the right and decrease output.
d. Shift the LM curve to the left and decrease output.

Answer 9

b. Shift the IS curve to the right and increase interest rates.

Question 10

An increase in the supply of money in the IS/LM model will:
a. Shift the IS curve to the right and increase output.
b. Shift the LM curve to the right and lower interest rates.
c. Shift the IS curve to the left and lower interest rates.
d. Shift the LM curve to the left and increase interest rates.

Answer 10

b. Shift the LM curve to the right and lower interest rates.

Question 11

An increase in taxes in the IS/LM model will:
a. Shift the IS curve to the right and increase output.
b. Shift the IS curve to the left and decrease output.
c. Shift the LM curve to the right and increase interest rates.
d. Shift the LM curve to the left and decrease output.

Answer 11

b. Shift the IS curve to the left and decrease output.

Question 12

In the IS/LM/BP model, a monetary policy contraction under a fixed exchange rate regime will:
a. Lead to a balance of payments surplus and an appreciation of the currency.
b. Lead to a balance of payments deficit and require central bank intervention to maintain the fixed exchange rate.
c. Have no effect on the balance of payments but decrease output.
d. Increase interest rates and reduce the need for foreign exchange intervention.

Answer 12

b. Lead to a balance of payments deficit and require central bank intervention to maintain the fixed exchange rate.

Question 13

In the Mundell-Fleming model with perfect capital mobility and flexible exchange rates, an increase in government spending will:
a. Lead to a currency depreciation and an increase in output.
b. Lead to a currency appreciation and a decrease in output.
c. Have no effect on the exchange rate but increase output.
d. Lead to a decrease in output and a balance of payments surplus.

Answer 13

a. Lead to a currency depreciation and an increase in output.

Question 14

In the Keynesian model, an increase in investment will:
a. Shift the IS curve to the left and decrease output.
b. Shift the IS curve to the right and increase output.
c. Shift the LM curve to the right and increase interest rates.
d. Have no effect on the IS curve but increase interest rates.

Answer 14

b. Shift the IS curve to the right and increase output.

Question 15

An increase in consumer confidence in the AD/AS model will:
a. Shift the Aggregate Demand (AD) curve to the left.
b. Shift the Aggregate Supply (AS) curve to the right.
c. Shift the Aggregate Demand (AD) curve to the right.
d. Shift the Aggregate Supply (AS) curve to the left.

Answer 15

b. Shift the Aggregate Supply (AS) curve to the right.

Question 16

The Pigou effect refers to:
a. An increase in consumption due to a decrease in the price level, increasing real wealth.
b. A decrease in consumption due to an increase in the price level, reducing real wealth.
c. An increase in interest rates due to a decrease in the price level.
d. A decrease in investment due to an increase in real wealth.
Answer: a. An increase in consumption due to a decrease in the price level, increasing real wealth.

Answer 16

a. An increase in consumption due to a decrease in the price level, increasing real wealth.

Question 17

In the circular flow of income, an increase in government spending without a corresponding increase in taxes will:
a. Increase aggregate demand and boost economic activity.
b. Decrease aggregate demand and reduce economic activity.
c. Have no effect on aggregate demand but increase economic activity.
d. Decrease economic activity by reducing savings.

Answer 17

a. Increase aggregate demand and boost economic activity.

Question 18

The liquidity preference theory suggests that changes in the money supply affect:
a. Only the level of aggregate demand.
b. Only interest rates.
c. Both interest rates and the level of aggregate demand.
d. The balance of payments but not interest rates.

Answer 18

c. Both interest rates and the level of aggregate demand.

Question 19

Under perfect capital mobility, the BP (Balance of Payments) curve in the IS/LM/BP model is:
a. Upward sloping, reflecting a trade-off between output and interest rates.
b. Horizontal, reflecting the perfect substitutability of domestic and foreign assets.
c. Vertical, reflecting the fixed exchange rate system.
d. Downward sloping, indicating increasing output leads to a higher balance of payments deficit.

Answer 19

b. Horizontal, reflecting the perfect substitutability of domestic and foreign assets.

Question 20

The purpose of the IS/LM model is to:
a. Analyze long-term growth trends in the economy.
b. Illustrate the interaction between the goods market and the money market in the short run.
c. Examine the effects of international trade on domestic output.
d. Assess the impact of monetary policy on exchange rates.

Answer 20

b. Illustrate the interaction between the goods market and the money market in the short run.

Question 21

Which of the following is not true for the IS/LM model?
a) Fixed price, short-run model
b) Interdependency between the goods and money markets
c) Interest rates are a function of investment
d) Keynesian demand-side model

Answer 21

c) Interest rates are a function of investment

Question 22

Gross Domestic Product (GDP):
a) is a stock concept, measures recorded economic activity, is a measurement at a point in time
b) is a stock concept, measures unrecorded economic activity, is a measurement at a point in time
c) is a flow concept, measures recorded economic activity, is a measurement over time
d) is a flow concept, measures unrecorded economic activity, is a measurement over time

Answer 22

c) is a flow concept, measures recorded economic activity, is a measurement over time

Question 23

In the different components of Aggregate Expenditure, Transfer payments are not accounted for in:
a) Exports (X)
b) Investment (I)
c) Consumption (C)
d) Government Spending (G)

Answer 23

d) Government Spending (G)

Question 24

In the IS/LM/BP model, it is not possible to attain which of the following simultaneously?
a) Effective monetary policy and a flexible exchange rate
b) A fixed exchange rate, perfect capital mobility, and an independent monetary policy
c) A fixed exchange rate and effective fiscal policy
d) Internal and external balances

Answer 24

b) A fixed exchange rate, perfect capital mobility, and an independent monetary policy

Question 25

Which pair below are examples of automatic stabilisers?
a) Interest rates and exchange rates
b) Saving and investment
c) Taxes and welfare payments
d) Prices and output

Answer 25

c) Taxes and welfare payments

Question 26

The IS curve is a depiction of the goods market in equilibrium. It is also true that:
a) Points left and below a given IS reflect excess supply of goods and services
b) The IS curve slopes negatively because of the inverse relationship between interest rates and savings
c) Autonomous spending changes along any given IS curve
d) The larger the sensitivity of investment to change in the interest rate, the flatter the IS curve

Answer 26

d) The larger the sensitivity of investment to change in the interest rate, the flatter the IS curve

Question 27

In the AD/AS model, the aggregate demand curve is negatively sloped because of:
a) The interest rate effect, the Pigou effect, and the real balance effect
b) The real balance effect, the interest rate effect, and the wealth effect
c) The Pigou effect, the real balance effect, and the wealth effect
d) The real balance effect, the interest rate effect, and the international trade effect

Answer 27

d) The real balance effect, the interest rate effect, and the international trade effect

Question 28

In the simple Keynesian model of income determination, investment is:
a) A stock concept and is volatile
b) A function of income and fluctuates with interest rates
c) The buying and selling of stocks and shares
d) Additions to the capital stock and volatile

Answer 28

d) Additions to the capital stock and volatile

Question 29

Using the IS/LM model, a monetary policy contraction:
a) Is more effective, the larger the sensitivity of money demand to changes in the interest rate
b) Is more effective, the steeper is the IS curve
c) Shifts the LM curve to the right, reducing interest rates and increasing national output
d) Shifts the LM curve to the left, raising interest rates and reducing national output

Answer 29

d) Shifts the LM curve to the left, raising interest rates and reducing national output

Question 30

Assume we combine contractionary fiscal policy with expansionary monetary policy. The result of this policy mix is:
a) Lower interest rates and an indeterminate level of output
b) Higher interest rates and lower output
c) Lower interest rates and higher output
d) Higher interest rates and an indeterminate level of output

Answer 30

a) Lower interest rates and an indeterminate level of output

Question 31

The slope of the AS curve reflects:
a) The real balance effect, the interest rate effect, and the wealth effect
b) The goods, money, and foreign exchange markets equilibrium
c) Short-run versus long-run, wage flexibility, Classical versus Keynesian
d) The stance of fiscal, monetary, and exchange rate policies

Answer 31

c) Short-run versus long-run, wage flexibility, Classical versus Keynesian

Question 32

At equilibrium in the simple Keynesian model of income determination, which of the following statements is true?
a) The market clears and quantity demanded equals quantity supplied
b) Investment is equal to saving, and actual GDP is equal to potential GDP
c) Investment is equal to saving, and income is equal to aggregate expenditure
d) Aggregate expenditure is equal to income and actual GDP is equal to potential GDP

Answer 32

c) Investment is equal to saving, and income is equal to aggregate expenditure

Question 33

Which statement on the multiplier is false?
a) The higher the MPC, the lower the multiplier
b) Leakages reduce the size of the multiplier
c) Keynes argued that the multiplier was relatively stable in the short run
d) The multiplier relates spending changes to income changes

Answer 33

a) The higher the MPC, the lower the multiplier

Question 34

Keynes’ General Theory differed from the Classical Theory. The pre-Keynesian school was dominated by which of the following?
a) Self-correcting markets, full employment, and wage stickiness
b) Say’s Law, effective demand, and self-adjusting markets
c) Market-clearing prices, Say’s Law, and wage flexibility
d) Equilibrium processes, balanced budgets, and discretionary demand management

Answer 34

c) Market-clearing prices, Say’s Law, and wage flexibility

Question 35

Which of the following statements on the AD/AS model is false?
a) The twin issues of inflation and economic growth can be depicted on the vertical and horizontal axis, respectively
b) Equilibrium is where aggregate demand is equal to aggregate supply
c) The AS line is always upward sloping
d) Prices and output are the endogenous variables

Answer 35

c) The AS line is always upward sloping

Question 36

The policy implications of the Keynesian income determination model are as follows:
a) Public works programmes and pro-cyclical fiscal policy
b) Discretionary demand management and yearly balanced budgets
c) Counter-cyclical fiscal policy and balanced budgets over the cycle
d) Yearly balanced budgets and fiscal rules

Answer 36

c) Counter-cyclical fiscal policy and balanced budgets over the cycle

Question 37

Using the AD/AS model, a tax change shifts:
a) Neither the AD curve nor AS curve as it is a microeconomic policy change
b) Only the AD curve as it is a demand-side policy
c) Only the AS curve as it is a supply-side policy
d) The AD curve or AS curve, depending on the economic school of thought

Answer 37

b) Only the AD curve as it is a demand-side policy

Question 38

Which of the following statements in relation to monetary policy is false?
a) Monetary policy in Ireland is set by the Central Bank of Ireland
b) The objective of monetary policy by the European Central Bank is price stability
c) The monetary transmission mechanism outlines how monetary policy changes affect output
d) Quantitative easing is a form of money creation

Answer 38

a) Monetary policy in Ireland is set by the Central Bank of Ireland

Question 39

In terms of the AD/AS model, the Covid-19 pandemic caused a:
a) Impossible to say
b) Demand-side and a supply-side shock, with falls in aggregate demand and aggregate supply
c) Supply-side shock only, with a fall in aggregate supply
d) Demand-side shock only, with a fall in aggregate demand

Answer 39

b) Demand-side and a supply-side shock, with falls in aggregate demand and aggregate supply

Question 40

Under a flexible exchange rate system, the three endogenous variables in the IS/LM/BP model are:
a) Prices, output, and unemployment
b) Output, interest rates, and money supply
c) Output, interest rates, and exchange rate
d) Income, output, and expenditure

Answer 40

c) Output, interest rates, and exchange rate

Question 41

The three motives for holding money in the liquidity preference theory:
a) Are used in the derivation of the downward-sloping IS curve
b) Are related positively to income and interest rates
c) Are related to the interest rate, real balances, and international trade effects
d) Are speculative, transactionary, and precautionary

Answer 41

d) Are speculative, transactionary, and precautionary

Question 42

In the third market of the IS/LM/BP model, which of the following is false?
a) The balance of payments line is usually upward sloping as interest rates and output are positively related
b) The balance of payments line is horizontal when capital is perfectly mobile
c) The balance of payments line represents the foreign exchange market
d) The balance of payments line represents the assets market in equilibrium

Answer 42

d) The balance of payments line represents the assets market in equilibrium

Question 43

In our four main macroeconomic models, which of the following statements is false?
a) Output is an exogenous variable
b) Our macro models are all short-run models
c) The goods and services market is represented in all four models
d) Output is a variable to be determined

Answer 43

a) Output is an exogenous variable

Question 44

In the IS/LM/BP model, which of the following statements is true?
a) Fiscal policy is effective when the exchange rate is flexible
b) Under a flexible exchange rate, monetary policy is effective
c) The IS/LM/BP is a Keynesian-type long-run, supply-constrained model
d) Above the horizontal BP line reflects a position of a balance of payments deficit

Answer 44

b) Under a flexible exchange rate, monetary policy is effective

Question 45

With respect to the circular flow model of national income, which of the following statements is false?
a) A rise in government spending, a fall in imports, and an increase in investment increases economic activity
b) A rise in exports, a fall in savings, and an increase in transfer payments increases economic activity
c) A rise in savings, an increase in exports, and a decrease in taxes increases economic activity
d) An increase in investment, a fall in taxes, and an increase in exports increases economic activity

Answer 45

c) A rise in savings, an increase in exports, and a decrease in taxes increases economic activity