Section II - Problem Set II - Answer Key (1).pdf

Section II - Problem Set II - Answer Key (1).pdf - Middle...

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1 Middle East Technical University Fall, 2016 Department of Economics ECON 202 Section 2 Instructor: Dr. Pınar Derin - Güre TA: Özgen Öztürk Due Date: Friday, October 28, 2016 at the beginning of the recitation hour (at 9:00, strictly) . No late problem sets will be accepted. MULTIPLE CHOICE ANSWERS WILL BE HANDED IN USING THE OPTICAL FORMS. PLEASE FILL IN YOUR OPTICAL FORMS WITH FULL CREDENTIALS (i.e. NAME and ID). OTHERWISE YOU WILL NOT GET ANY POINTS FROM MULTIPLE CHOICE PART. EMPTY OPTICAL FORMS WILL BE HANDED IN CLASS ON WEDNESDAY , or YOU CAN OBTAIN FROM ÖZGEN’S OFFICE (A211). Note: Please keep your answers short ! In most cases two or three sentences will be more than enough. If your answers are too long or contain obviously irrelevant information you may incur a penalty, i.e. brevity in your responses is strongly recommended. If you would like, you may work in small groups of 2-3 people to discuss the problem sets. However, you must write up answers individually. If you decide to work in a group, please list the names of the group members on your problem set. A note on academic integrity: As the syllabus clearly states, work that you hand in should be your own work: “A student shall not submit work […] that is not the result of the student’s own effort.” Please show your work for full credit on analytical questions, i.e., show the formulas, calculations (if appropriate). Do not report only the final answers for the essay questions. PART I - MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy? A) financial markets are in equilibrium. B) production equals demand. C) the quantity supplied of bonds equals the quantity demanded of bonds. D) the money supply equals money demand. E) all of the above. 2) In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy. Which of the following will occur as a result of this monetary policy action? A) the LM curve shifts down. B) the LM curve shifts up. C) the IS curve shifts leftward as the interest rate increases. D) the IS curve shifts rightward as the interest rate falls. E) none of the above. PROBLEM SET #2
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2 3) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action. A) investment spending may increase, decrease, or not change. B) investment spending will decrease. C) there will be no change in investment spending. D) investment spending will increase. E) none of the above. 4) Suppose investment spending is NOT very sensitive to the interest rate. Given this information, we know that: A) the LM curve should be relatively steep.
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