The Model of Aggregate Supply and Aggregate Demand in the Short Run Differs from Our Long-Run
Final Exam (2013) - Macroeconomics (50 points)– Type A
Name: Major: Student Number:
Answers to the multiple choice questions: (30 points)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
11. 12. 13. 14. 15.
1. When the government increases it spending and the central bank increases money supply, what would be the effects of on income, consumption, investment, prices in the short run? What about in the long run? Explain using the IS-LM model and AD-AS model simultaneously. (10 points.)
2. Explain the recent trend of Korea’s business cycle. Discuss how the government and the Bank of Korea have recently reacted to it. What would be the prospects of Korea’s business cycle? (10 points. Please write your answer in the back page).
Multiple choice questions. (30 points)
1. Which of the following statements is FALSE about the business cycle?
(1)The fluctuations in nominal GDP are called the business cycle.
(2)The business cycle is not easily predictable.
(3)Consumption and investment fluctuate with GDP, but consumption tends to be less volatile and investment more volatile than GDP.
(4)Economists generally believe that output moves towards its full employment level in the long run.
(5) Unemployment rises during recessions and falls during expansions.
2. In the Keynesian-cross model, if investment, taxes, and government purchases are held constant, the slope of the planned expenditure curve equals to:
(1)- MPC (2) 1- MPC (3) 1.0 (4) -1.0 (5) MPC
3. In the Keynesian cross model of Chapter 10, if the MPC is 0.8, and government expenditure is increased by $100 and taxes are also increased by $100, respectively, how much does income change?
(1) It increases by $100. (2) It decreases by $100. (3) It increases by $500. (4) It increases by $900. (5) It increased by $1,000.
4. If there is a negative shock on investment, then
(1) the LM curve will shift to the left and the AD curve will shift to the right.
(2) the LM curve will shift to the right and the AD curve will shift to the left.
(3) the IS curve will shift to the right and the AD curve will shift to the right.
(4) the IS curve will shift to the left and the AD curve will shift to the left.
(5) the LM curve will shift to the right and the AD curve will shift to the right.
5.Which of the following statements is FALSE about the IS-LM model?
(1) The equilibrium condition in the goods market is:
(2) The IS-LM model explains the demand-side equilibrium condition of the economy.
(3) The equilibrium condition in the money market is:
(4) The IS curve can be derived from the liquidity preference model and the LM model can be derived from the Keynesian Cross.
(5) The intersection determines the combination of Y and r that satisfy equilibrium in both goods and money markets.
6. Which of the following is endogenous in the IS-LM model?
(1)money supply (2)taxes (3) income and the interest rate
(4) the price level (5) government expenditure
7. If the government increases itsexpenditure the central bank does not change its target interest rate, then in the IS-LM model:
(1) income will fall.
(2) income cannot be determined from the information given.
(3) income will increase.
(4) income wouldn’t change.
(5) incomemay increase or decrease.
8. The model of aggregate supply and aggregate demand in the short run differs from our long-run model of the economy because, in the short run
(1) the interest rate is fixed. (2) output is fixed. (3) prices are fixed.
(4) employment is fixed. (5) everything is fixed
9. If the price level increases, then
(1) the LM curve would shift to the left. (2) the LM curve would shift to the right.
(3) the IS curve would shift to the left. (4) the IS curve would shift to the right.
(5) None of the above.
10. If the short-run AS curve is horizontal and the long-run AS curve is vertical, then an increase in money supply will in the short run and in the long run.
(1) increase only prices; increase only output.
(2) increase only output; increase only prices.
(3) decrease only prices; decrease only output.
(4) decrease only output; decrease only prices.
(5) increase both prices and output; only prices.
11. Which of the following statements is NOT CORRECT?
(1) The inside lag is the time between a shock to the economy and the policy action responding to that shock.
(2) The outside lag is the time it takes for policy to affect economy.
(3) Because of the existence of the inside lag and the outside lag, the stabilization policy cannot easily stabilize the economy.
(4) Fiscal policy has a much longer outside lag than monetary policy.
(5) None of above
12. Which of the following statements is NOT true regarding the arguments regarding stabilization policy?
(1) It consists of fiscal policy and monetary policy.
(2) It aims at stabilizing business cycles.
(3) Proponents of active policy argue that recessions cause economic hardship for millions of people and therefore the government should do some active role.
(4) Proponents of active policy argue that economic forecasts are often wrong.
(5) Proponents of passive policy argue that automatic stabilizers such as income tax and unemployment insurance are strong enough to stabilize the economy.
13. The monetary-policy rule that the Bank of Korea is currently following is
(1) an unemployment targeting. (2) a steady rate of growth of the money supply.
(3) nominal GDP targeting. (4) inflation rate targeting.
(5) There is no targeting.
14. Which of the following is a FALSE statement about automatic stabilizers
(1) They are policies that stimulate or depress the economy when necessary without any deliberate policy change.
(2) They largely eliminate the business cycle in the short run.
(3) Their examples are income tax and unemployment insurance.
(4) The existence of automatic stabilizers is one of the arguments against active stabilization policy.
(5) None of the above.
15. Which of the following statementsis FALSE?
(1) In the long run, prices are flexible and output is determined by factors of production & technology.
(2) In the long run, unemployment equals its natural rate.
(3) In the short run, prices are fixed and output is determined by aggregate demand.
(4) In the short run, unemployment is positively related to output.
(5) In the Keynesian cross model, if the actual expenditure is greater than planned expenditure, then unplanned inventory investment decreases.
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