very easy Macroeconomics multiple choice questions 10 questions 3 short answers
1. The U.S. dollar is called fiat money because
(a) each dollar entitles the bearer to a certain amount of gold (b) it is subject to the double coincidence of wants problem
(c) it allows Americans to buy a Fiat car (d) it is intrinsically valueless, its value is guaranteed by the government
2. During a boom, the government should
(a) implement a contractionary fiscal policy: that is, cut spending G and increase taxes T (b) implement an expansionary fiscal policy: that is, increase spending G and cut taxes T
(c) keep the budget balanced (d) implement an expansionary fiscal policy: that is, increase taxes and cut spending
3. A bank run is:
(a) a bank operation to increase the amount of reserves (b) an annual race held between bankers
(c) a massive withdrawal of deposits that creates the risk of bank bankruptcy (d) none of the above
4. Suppose that the government taxes household proportionally to their income. What happens to the value of the multiplier when the tax rate decreases?
(a) it will not change (b) it will decrease
(c) it will become equal to one (d) it will increase
5. Suppose that the MPC is 0.6 and the tax rate is 0.4. What is the value of the multiplier?
(a) 2.5 (b) 1.56
(c) 0 (d) 1
6. The reason why proportional taxation is called ”an automatic stabilizer” is because
(a) it increases the multiplier and hence makes the economy over-expand during a boom (b) it stabilizes the MPC of the agents, which, otherwise, will take values above 1
(c) it reduces the impact of both positive and negative shocks on economic activity (d) it automatically makes everybody’s income the same.
7. An expansionary fiscal policy might not be as successful as planned by the government if, meanwhile 1
(a) imports increase (b) he stock market crashes and hence consumption decreases
(c) physical investments (I) decrease (d) all of the above
please show
all work for the last 3 short questions
thank you so much
(a) imports increase
(b) he stock market crashes and hence consumption decreases
(c) physical investments (I) decrease
(d) all of the above
8. What is the main role of banks in the macroeconomy?
(a) They can print cash
(b) They issue bonds to households that want to save
(c) They intermediate between savers and borrowers
(d) They create bank runs
9. What is the key and main role of money in the economy?
(a) It is a store of value
(b) It is a unit of account
(c) It is a commodity
(d) It is a medium of exchange
10. The di↵erence between M1 and M2 is given, mostly, by
(a) bills and coins in circulation
(b) checking accounts
(c) saving accounts
(d) gold and silver
SHORT ANSWER SECTION (60 points) Please provide very short answers to the following questions
1. 20 points Suppose the government levies only proportional taxes. In particular assume that people pay to the government 25% of their earned income. The MPC is assumed to be 0.8.
(a) Compute the value of the multiplier.
(b) By how much would the AD curve shift (or equivalently output Y increase) if G increased by $50 million?
(c) Now suppose the government increases the tax rate. How would your answer change with respect to b)? Namely, for the same change in G, are we going to observe a lower, larger or equal shift in AD? Why?
2. 20 points. Suppose the economy faces a recessionary gap. Answer the following:
(a) What fiscal policy can bring the economy to full potential output? What changes in G and/or T?
(b) Using the AD-AS graph, show how such policy can eliminate the gap.
(c) Discuss about how the trade-o↵ between higher output (and therefore lower unemployment) but positive inflation faced by the government depends on the steepness/flatness of the AS curve.
3. 20 points. Suppose that the economy is in recession with a recessionary gap of $1 trillion. The MPC is 0.9 and the tax rate on income is 30%. Answer the following
(a) Compute the value of the multiplier.
(b) Suppose the AS curve is completeply flat. What would be the change in G needed to make the gap equal to zero?
(c) Would the change in G you found in b. be enough if the AS curve was positively sloped? Explain using the appropriate graph.
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