312 Final 2001

Principles of Macroeconomics: A Study Guide

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Unformatted text preview: Name: Colorado School of Mines Division of Economics and Business EBGN3 I 2 - Principles of h'laomeconomics Fall Zflfll - FINAL EXAM tott—___ Section (Total 101] points} MULTIPLE CHOICE [I'll] questions) 1. Mary wants to trade piano lessons for ice-skating lessons. Sarah wants to trade ice- skating lessons for piano lessons. Mary and Sarah base {a} a double coincidence of wants. (b) a double incidence of demand. (c) the basis for a double fiat exchange. {d} the basis for a liquidity exchange. Aggregate demand Falls when the price level increases because the higher price level causes (a) the market clemnnd for all goods and services to decrease. [b} the sop-ply of money to decrease. [cl the demand for money to rise. {d} interest rates to fall. Dena won $10,000 at a bingo game. She deposits her illlJlflll winnings into a money market fund so that she can use the money next year to pay her tuition. This is an example of money serving as [a] a unit of account. lb} :1 store of value. {c} a medium of exchange. {d} an investment good. Things thata firm owns that are worth something are classified as {a} liabilities. {b} deposits. to} assets. (d) net worth. A unit of account is {a} what sellers generally accept and buyers generally use to pay for goods and services. (b) an asset that can be used to transport purchasing power from one period of time to another. (e) a standard unit that provides a consistent way of quoti ng prices. {d} the ability to buy sotnething today but to dei'es payment to the future. The direct exchange of goods and services l'or other goods and services is (a) barter. {b} a fiat exchange. [cl a legal tender exchange. {d} a unit of account exchange. T _ An item designated as money the: is intrinsicain worthless is {a} fiat money. (h) precious metals. to] barter items. {d} oommodity money. Money that can be directly used for transactions is {a} near money. [h] broad money. {c} Ml. [d] M2. 9' _ A loan made by a bank is considered of that bank. (a) a liability {b} an asset {e} net worth {d} capital [0. - The liquidity property of money is the property that makes money (a) at good medium of exchange and a good unit of account. {1:} a good medium of exchange and a good store of value. (c) a good store of value and a good unit of account. {d} a good store of value and a good standattd of deferred payment. 11. - Achookingdepositinabankisoonsidetod ofthat bank. {a} a liability (b) an asset {c} not worth (d) capital Refer In Figure 11.4 First Charter Bank could make additional loans of IUD. if [2- ' the requiredreserye ratio were (I) 1095. {h} 20%. {It} 15%. (d) 30%. [3. min is M" "1' Film! 11.4. Fit-oi Charter Bank Iwill be loaned up if the required rem m" “A T Account for First Charter Bank gig: Assets Liabilities I W to} 30s. Reserves 30D 1.000 - - - Deposits {d} 33.33%. Loans 700 1,000 1,000 —-—-————._____ 14. ~ 15. - [6. - I'll. - 13. - 1'9. - Banks can create money (a) only by illegally printing additional dollar bills. {h} by paying interest to their depositors. {c} by making loans that result in additional deposits. {d} by offering financial services. such as money market accounts. If the money multiplier is 2, the required reserve ratio is [a] 2%. {to nose. is} 25%. (d) son. Refer to Figure 123. The demand for money curve will shift from My to tofu {a} the Fed sells government securities on the open market. {b} the price level decreases. {c} if the interest rate increases. id] the level of aggregate output increases. [riterest rate; The interest rate banks pay to borrow money from the Fed is the (a) federal funds rate. {b} prime lending rate. {c} discount rate. {d} reserve rate. In the United States. monetary policy is formally set by the (a) Federal Open Market cdmndaee. {h} Council of Economic Adfisors. (c) Department of the Treasury. {d} Office of Management and Budget When economists Speak of the “demand for money." Which of the following questions are they asking? (a) How much cash do you wish you could have? [bl How much income would you like to earn? {c} How much 1wealth. would you like? (d) What proportion of your financial assets do you want to hold in noninterest bearing forms? 211 - Refer to Figure 11.3. At an interest rate of 8%. there is I h (a) an excess supply of money of 2511 5 (b) an excess supply of money of Jill. E (c) an excess demand for money of E 5 [ill 5 a [d] an excess demand for money of 250. 21. - Refer to Figure 12.3. At an interest rate of 3%. firms and households {a} Iwill attempt to reduce their holdings of money by buying bonds. (b) will attempt to increase their holdings of money by Selling bonds. (c) are satisfied with the amount of money they are holding. (d) will attempt to increase both their holdings of moneyr and theirlloldings of bonds. 22. - _ I An open market purchase of securities by the Fed results In in reserves and_ in the supply of money. (a) an increase: a decrease (h) an increm: an increase (of: a decrease; a decrease (d) a doe-tease: an increase 23' ' Which of the following represents an. action by the Federal Reserve which is designed to increase the money supply? {a} an increase in the discount rate {b} an increase in federal spending to] buying government securities in the open market (d) an increase in the required reserve ratio 24. — The main reason that people hold money -— to buy things —- is referred to as the (a) speculation motive. {h} precautionaiy motive. (c) o'ansactions motive. {cl} profit motive. 25- ‘ In terms of the demand for money. the interest rate represents {a} the price of borrowing money. {h} the return on money that is saved for the future. to) the rate at which current consumption can be exchanged for future consumption. id} the opportunity cost of holding money. 26. - An increase in the interest rate will {a} lower the optimal money balance. (b) increase the optimal money balance. b M h noim toniheoptimalmoney a e. r all; inereasepm or decrease the optimal money balance depending upon the level of content household wealth. 27. - When the interest rate rises. bond values % {at fall. (b) rise. to) ateunclunged because the interen rate paid on a bond is fixed. {it} Iwill either increase or decrease depending on the type of bond. litters-st rate,r 28. - . Refer to Figure 12.1.1115.- money demand curve will shift from ref to use (a) the interest rate increases. lb) the interest rate decreases. . {c} aggregate output increases. to} h and c. Figure 12.1 29' ' The two links between the goods market and the money are [at income and the interest rate. {hi the interest rate and the unemployment rate. to) ineoma and the inflation rate. _ (d) the inflation rate and the unemployment rate. 3t} - Which of the following statements is FALSE? {a} Income. which is determined in the money market. has an important influence on the demand for money in the goods market. I [b] The interest rate. which is determined in the money market. has important effects on planned investment in the goods market. I {c} When the interest rate fails. planned investment nses. [d] When the interest rate rises. planned investment falls. 31- ' If output. increases and the interest rate remains constant. there will be (a) a decrease in the quantity of money demanded. (b} an increase in the quantity of money demanded. {c} a decrease in the quantity of money supplied. {d} an increase in the quantity of money supplied. 32. - Fora given interest rate. a higher few! of output means {a} a decrease in the number of transactions and thus a lower demand for money. (In) a decrease in the number of transactions and thus a higher demand for money. to} an increase in the monster of transactions and thus a lower demand for money. {d} an increase in the number of transactions and thus a higher demand for money. 33_ - Which of the following statements is CORRECT? {a} When the interest rate rises. it becomes more expensive to borrow. and fewer investment. projects are likely to be undertaken. [bl When the interest rate rises. it becomes more expensive to borrow. and more invesn'nent projects are likely to be undertaken. it] When the interest rate rises. it becomes less costly to borrow. and more investment projects are likely to be undertaken. {d} When the interest rate rises. it becomes less costly to borrow. and fewer investment projects are likely to be undertaken. UI ‘i’a 34, - If there is an excess supply of money. then the interest rate {a} is below the equilibrium interest rate. {it} is above the equilibrium interest rate. (c) equals the equilibrium interest rate. (d) must be equal to zero. Interest rat-c.1- fl um 35- " Refer to Figure 12.3. At an interest rate of 8%, firms and households (3} will attempt to reduce their holdings of money by buying bonds. {it} will attempt to increase their holdings of money by selling honds. (c) are satisfied with. the amount of money they are holding. (d) will attempt to increase both their holdings of money and their holdings of bonds. Fm 113 35' _ when eonnmnists refer to “easy” monetary policy. they mean that the Federal Reserve is taking actions that will (a) increase the demand for money. {It} decrease the demand for money. to] expand the money supply. (d) contract the money supply. 3?” ' A decrease in the interestrarie Will cause the (a) long-run aggregate supply curve to shift out. {in} aggregate expenditure curve to shift down. {e} aggregate expenditure curve to shift up. (d) investment demand curve to shift to the right. 33. - As the average dollar amount of each transaction increases. (a) the demand for money will decrease. {h} diedemand for money will increase. to) the quantity demanded oftt'toney Will increase. {d} the quantity demanded of money will decrease. * If the amount of money demanded by hummus and f. . l 35'. amount in circulation as demim by “It Fad. arms is ess than the [a] the money supply will decrease. {is} the money sUpply 1will increase. {c} the interest rate will immense. {d} the interest rate will decrease. 4D. - As the interest rate increases. {a} planned investment decreases. but aggregate expenditure remains constant. (h) planned investment increases. but aggregate expenditure remains constant. (e) planned invesnnent decreases and aggregate expenditure decreases. {d} planned investment increases and aggregate expenditure increases. 4 i- - ttctcc ic Figure 13.2. Which of the following statements is TRUE? {a} r” = r|= r2. (h) roe rI :- r1. (c) r“ e r1 «c r1. (:1) r“ a: ti > :1. :c. I?! "c. Planned aggregate expenditure v v v » ' Y Figure 13': figgfggfi'u telctutpill [immuei' 42. Which of the following actions is an example ofcxpsnsionary itsch policy? {a} a decrease in welfare payments {h} a purchase of government securities in the open market {e} ndectease in the required reserve rartio {d} a decrease in the omporate profits tax rates 43. - An increase in government spending or a reduction in net taxes aimed at increasing aggregate output is referred to as {a} contraction fiscal policy [in] expansionary fiscal policy. ' {e} expansionary monetary policy. {d} connectionary monetary policy. 44- ' An income: in egg-negate output causes the demand for money to and the interest rate to (a) increase: increase {In} increase: decrease (c) decrease: decrease (d) decrease: increase - 45- - The tendency for increases in government spending to cause reductions in private investment. spending is {a} fiscal drag. [h] the crowding—out. el’l'ect+ {c} Ricardian equivalence. (d1 limcket creep. 415. - Which of the following pairs of events will definitely lend to a decrees: in the equilibrium interest rate? {a} the pita-chase of government securities by the Federal Reserve and a decrease in the level of aggregate output {b} an increase in the discount rate and an increase in the price level (c) a decrease in the required reserve ratio and an increase in the level of aggregate output {cl} the sale of government securities by the Federal Reserve and a decrease in the price level 4T. - 4s. - 49. v 50. - The market in which the equilibrium level of the interest rate is determined is the (a) labor market. {in} goods market. is] money market. (d) bond market. It planned investment decreases as the interest rate increases. the size of the government spending multiplier will be {a} smaller than the government spending multiplier that 1would result if planned investment were independent of the interest rate. Eh} larger than the government spending multiplier that would result if planned investment were indepenth of the imerest rate. is} the same as the government spending multiplier that would result if planned investment 1.Iverc independent of the interest rate. (dime. The size of the “crowdingeout” effect depends on several things. including {a} tl'te_sensitivit3«r ol planned investment spending to changes in the interest rate. [is] the composition of the federal budget. [e] the structure of the personal income tax code. {d} the size of the governmem spending multiplier. Refer to Figure 13.8. After government spending is reduced, the planned aggregate expenditure function may shift up to C+I'+G’ because the reduction in output 1nu'iil cause {a} money supply to increase. the interest rate to decrease. and planned investment to increase. {h} money supva to decrease. the interest rate to decrease. and planned invesnnent to increase {c} money demand to decrease. the interest rate to decrease. and planned investment to increase. [d] money demand to increase. the interest rate to decrease. and planned investl'rtenl to increase. C-i-l-t-G l.'_.‘+I-il23l:r=rl'i]I C+l‘+t3'{r=r'i C+l+G'{I=r“] till] 200 we 40o Figure 13.3 The severity of the crowding-out effect will he reduced if i i. - {a} the Fed increases the money supply at the same time the federal government increases government spending. (h) the Fed decreases the money supply at the same time the federal government increases government spending. to) the Fed does not change the money supply when the government increases government spending. {it} busian firms become pessimich about the future. 52' - An increase in the level of aggregate output {a} leads to an increase in the interest rate. (it) leads to a decrease in the interest rate. [cl will increase money demand. but will not affect the interest rate. (d) will increase money supply. but will not affect the interest rate. 53. - The market in which the equilibrium level of aggregate output is detenrdned is the {a} labor market. {It} goods market. {El money market. it!) bond market. 54 - When economists refer to "tight" monetary polic mean at. that the Federal Reserve is taking actions that will they {a} increase the demand for money. {It} decrease the demand for money. (c) expand the money supply. [d] eon not the money supply. 55- " The money market is cun'endy in equilibrium. but. the Fed wants to reduce the interest rate. The Fed should pursue policies to {a} increase the money supply. {h} decrease the money supply. (c) increase money demand. {d} malre the supply of money more inelastic. 55- - [f planned investment becomes more sensitive to interest rate changes, the crowding-out effect will (a) fall to aero. (b) not be aifected. (c) be reduced. id} be increased. 5?. - Ifthe government reduces nettaxes which of the following chain of evean will occur? .. {a} Aggregate output i-noreascs.-the-demand-for money-decreases. the interest rate decreases. planned investment spending increases. and aggregate output increases. [b] Aggregate output decreases. the demand for money increases. the interest rate increases. planned investment decreases. and aggregate output decreases. [-3) Aggregate cutput decreases. the demand for money decreases. the interest rate decreases. planned investment increases. and aggregate output increases. {d} Aggregate output increases. the demand for money increases. the interest rate increases. planned investment decreases. and aggregate output decreases. 53. - fifll- til. - £2. - 63. - Refer to Figure 14.7. Batavia is in equilibrium at price level Pu and output level Yo. If the price of oil increases in Batavia. the new equilibrium price will be Po and the new equilibrium level of output will be Yo. {a} greater than: greater than {b} greater than; less than to) less than; less than {ti} less than: greater than i n The ADXAS curves for Bataws Figure 14.? Y Refer to Figure 14.1 Eatavia is in equilibrium at price level Po and output level a. If the size of the Iahcrtorce increases in Batavia. the new equilibrium price will be Pu and the new equilibrium level of output will be __ Yo. (a) greater than: greater than [it] greater than: less titan to} less than; less than [til less than: greater than Refer to Figure 14.1 Batavia is in equilibrium at price level Pu and output level Ya. If government spending is reduced in Batatria. the new equilibrium price will be Pnand the new equilibrium bevel ofcutput will be Yo. {a} pester than; greater than (b) greater than: less than to] less than: less than (d) lms than; great” 1h“ As the size of the crowding-out effect increases, the government spending multiplier {a} will increase. [b] will decrease. {c} will remain unchangei but the investment multiplier will increase. (d) will either increase or decrease, depending upon the size of the marginal propensity to consume. Monetary policy can be effemive only if (a) the money supply reacts to changes in the interest rate. (hi money demand reacts to changes in the interest rate. in] planned investment reacts to changes in the interest rate. {d} government spending reacts to changes in the interest rate. Which of the following statements is FALSE? {a} Changes in aggregate output. which take place in the goods market. shifl the money demand curve and cause changes in the interest rate. (it) The equilibrium level of the interest rate is determined exclusively in the money market. and is not affected by changes in the goods market. ‘ {c} With a given quantity oi money supplied. higher levels of aggregate output will lead to higher equilibrium levels of the interest rate. {rt} Low levels of aggregate output will lead to lower equilibrium levels of the interest me. Ya Aggregate output ll} 54- 65. - 6T, - 63. - d9. - Til. - If the Fed increases the money supply at the same time the federal govemthent increases government spending. the severity of the crowding-out effect {at will not be affected. {b} will be increased. (c) will be reduced. {d} could either increase or decrease depending on the sensitivity of planned investment to the interest rate. At every point along the aggregate demand curve the level of aggregate output demanded is (a) greater than planned aggregate expenditure. {b} equal to planned aggregate expenditure. to) less than planned aggregate expenditure. (d) unreiated to the concept of planned aggregate expenditure. A doctease in the money supply will cause planned invesnnent to and consumption to (a) decrease; decrease [bi decrease: increase is) increase: increase {d} increase: decrease The graph that shows the relationship between the aggregate quantity of output supplied by all the firms in an economy and the overall price level is {a} the aggregate demand curve. (In) the aggregate production function. to) the production possibilities frontier. {d} lite aggregate supply curve. A decrease in net taxes at a given price level leads to {a} no change in aggregate demand. {It} a decrease in aggregate demand. to) an increase in aggregate demand. {d} a decrease in aggregate supply. its the economy nears full capacity, the shim-am aggregate supply curve {a} honorees flatter. {it} becomes steeper. {e} shifts to the right. {d} shifts to the left. Which of the following is the sequence of events following a contractionary monetary policy? (a) money demand increasesr causing interest rates to increase. causing planned investment to fall and aggregate output to fall. (In) aggregate output falls. causing lite demand for money to fall. causing interest rates to rise. causing planned investment to decrease (c) interest rates decrease. causing planned investment to decrease, causing aggregate output to decrease. causing moneyI demand to decrease {d} interest rates increase. causing planned investment to decrease. causing aggregate output to decrease, causing money demand to decrease ll 71' - A contractionary monetary policy will shift the (a) aggregate demand curve to the left. {it} aggregate demand curye'to the right. {it} aggregate supply curve to the lefi. (d) aggregate supply curve to the right. 12. - If planned investment does not fall when the interest rate rises. there will be {a} no crowdingvout effect. [th a substantial crooning-out effect. {c} a slight crowding-om effect, {d} a complete crowding-out efl'ect. T3 Laura is in charge of economic policy. and her major concern is that interest rates ' ‘ are too highfihe asks you what policy she should pursue to lower interest rates. Which of the following policies would you reomnmend? {a} an expansionary fiscal policy (In) an expansionary monetary policy {c} a t:entrant-tionatjir monetary policy {d} the demand for money should be increased i4. - The curve that shows the negative relationship between aggregate output and the price level is known as the (a) aggregate demand curve. (b) aggregate supply curve. (e:- aggregate prorloction function. (d) money demand curve. 71 ' A decrease in government spending will cause interest rates to planned investment spending to {a} fail; decrease [bi fall; increase {c} rise; increase (d) rise; decrease and T6. - A decrease in government spending or an increase in net lattes aimed at reducing aggregate output is retested to as (a) an expansionary fiscal policy. this oontractionary fiscal policy. {c} a eonh-aotionary monetary policy. {d} an expansionary monetary policy. i1 - Each point on the aggregate demand curve is a point at which both the market and the market are in equilibrium. (all goods; labor {h} labor: money to) labor: bond {d} goods; money 13L - Money demartdhis a function of all the following variables except the in) interest late to] tax rate to} price level (d) level of real income m _ The aggregate demand curve is derived under the assumption that ' all the following variables remain unchanged except (a) government purchases. {it} not taxes. in) the price level. {d} the money supply. 8i}. - it‘ the government increases government spending, {a} only the goods market will be affected. [in] only the money market will be affected. (c) both the goods market and the money market will be affected. (d) neither the goods market not the money market will he afl'ected. 3]. - You are a member of the Council of Economic Adfisors. and you are concerned that the inflation rate is too high.Whieh of the following policies should you recommend? (a) an increase in the money nipply {th a decrease in the money supply (c) a decrease in income tax rates {d} an increase in government spending 31- ‘ Assuming that investment spending depends on the interest rate, as the simply of money is increased. the interest rate and planned investment spending —|' (a) falls; increases (hf:- t‘alls: decreases [c] rises; decreases (d) rises; increase-s 83. - The government increases spending while the Fed ineremes the money supply so that the interest rate will remain unchanged. In this situation. there will be [a] complete crowding-out. {h} substantial, but less than complete1 crowding-out. to) slight crowdingrout. {d} no crowding-out. 34. - Which of the Following actions is an example of a connectionary fiscal policy? {a} an increase in the discount rate {h} a decrease in defense spending (c) a sale of government secun'ties in the open market to} a decrease in income tax rates [3 35 If planned investment is sensitive to the interest rate. an increase in the interest ' rate causes the [a] long-run aggregate supply curve to shift out. (h) aggregate expenditure curve to shift up. {c} aggregate expenditure curve to shift down. id] investment demand schedule to shift to the right. This would cause (a) the short-run aggregate supply curve to shift to the right. {h} the short-run aggregate supply curve to shift to the left. to} the short-run aggregate supply curve to become flatter. {d} the short-run aggregate supply curve to become nearly vertical at all levels of output. 8?. _ An increase in aggregate demand when the economy . . is ratio atful] ‘ rs likely to result in at” E capacity [clan increase in the overall price level but no increase in output. I {h} an increase in output but no increase in the overall price level. to) an increase in both output and the overall price level. {d} no increase in either output or the overall price level. 83. - It the Fed accommodates a fiscal expansion by increasing the money supply so that the interest rate does not increase1 the crowdingruut effect will (a) be zero. [h] increase. {c} decrease. but still be positive. {d} become infinitely large. 39. - An increase in government purchases at a given price level leads to (a) an increase in aggregate supply. (Is) a decrease in aggregate demand. to] no change in aggregate demand. [dian increase in aggregate demand. 9'3. - In the short run. the aggregate supply curve is (a) fairly flat at very low levels of output and vertical at capacity. I I {b} vertical at low levels of output and fairly flat at capacity. {c} is a straight upward sloping line with a constant slope. (d) is horizontal over all levels of output. 91 _ Web of the following sequence of events occurs in response so a contractiotu ' fiscal policy? {a} aggregate output decreases, causing money demand to decrease. causing the interest rate to decrease and planned investment to increase (h) aggregate output decreases. causing money demand to increase. causing interest rates to increase and planned investment to decrease {e} aggregate output decreases. causing planned investment to decrease, causing interest rates to decrease and money demand to decrease (d) aggregate output decreases, causing the demand for money to increase. causing interest rates to increase and planned invesunent to increase I4 92. ~ If the invesunent demand curve is vertical. fa} both monetary and fiscal policy are ineffective. (it) both monetary and fiscal policy are effective. {c} monetary policy is effective. but fiscal policy is ineffective. {d} monetary policy is ineffective. hut fiscal policy is effective. 93. - The aggregate demand curve would shift to the lef t if (a) government spending were increased. {h} net taxes were increased. to) the money supply were increased. {d} the interest rate decreased. 94 _ ' Which of the following would cause the short-run aggregate supply curve'to shift ' to the right? {a} higher energy prices {it} an increase in taxes [cl increases in government regulation {d} retired workers reentering the labor force 95- ‘ Monetary policy affects the goods market by (a) changing the interest rate, which changes planned investtnent. (It) directly increasing consumption. which increases aggregate output. {c} changing money demand. which changes the interest rate and the level of planned investment. [d] changing the level of aggregate output. which changes the level of planned expenditure. 96" ' If firms sharply increase the number of investment projects undertaken when interest rates fall and sharply reduce the number of investment projects undertaken when interest rates increase. then {a} expansionary fiscal policy will he veryeffective. [b] contaactionary fiscal policy will be very effective. {c} expansionary monetary policy will he very effective. (cl) contractionary monetary policy will not be effective 91'. - An increase in the quantity of money supplied at a given price level causes (a) no change in aggregate demand. [h] a decrease in aggregate demand. to) an increase in aggregate demand. {d} an increase in aggregate supply. 93 _ An increase in aggregate demand when the eeonmny is operating at loin:I levels of output is likely to result in [a] an increase in the overall price level but little or no increase in output. {h} an increase in output but little or no increase in the overall price level. (c) an increase in both output and the overall price level. {d} little or no increase in either output or the overall price level. 15 99. - IUD. The aggregate supply curve {a} is the sum of the individual supply curves in the mummy. [hi is a market supplg.r curve {e} embodies the same logic that lies behind an individual fimfs supply curve. (d) is none of the above- Refer to Figure 13.5. Planned investment weutd increase from $10 million to $15 million if {a} the government increases gnvenmtenl spending. {It} the govemme'nt reduces net taxes. 0:) the Fed sells bonds in the open market (it) Eh: Fad mittens the acquired reserve ratio. to 15 1s _ H 1 Planned Investment (In billions} Figure 13.5 -_—-_-_— '—--‘-—-_. —--——-u—n-_——..__ HAVE A NICE BREAK! 16 ...
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312 Final 2001 - Name: Colorado School of Mines Division of...

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