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2008_spring_midterm2 - ECO320L-Macroeconomic Theory Midterm...

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ECO320L-Macroeconomic Theory Midterm 2 Total 100 points NAME: ............................................................. Some Remarks: 1. Books and notes should be closed. 2. You can use a calculator. Exchange of calculator is not allowed. 3. Do not forget to label axes when you draw a graph. 4. Show your work. Good Luck!
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Total Exam Grade: ( ......... /100pts) Multiple Choice Questions ( ......... /45pts) (5pts each) 1. The Ricardian equivalence theorem implies that a government debt policy must be handled correctly for the economy to prosper. b the amounts of government spending are neutral. c an increase in government spending has no effect on the economy, as long as there is an equal change in taxes. d the timing of taxes collected by the government is neutral. 2. The government wants to reduce current account deficit. To achieve that it increases current taxes to reduce current government deficit. But it does not change its expenditures. This policy would be successful in reducing current account deficit if a there are international capital inflows and outflows. b there are constraints on the level of government spending. c there are constraints on consumers’ borrowing. d there are constraints on the level of government taxation. 3. If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a in “current” consumption and a in saving, for someone who’s a lender. a fall; fall b fall; rise c rise; rise d rise; fall 4. If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved of the extra income. (a) more than $200 (b) less than $200 (c) exactly $200 (d) none
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