381 Econ 381 Fall 2009 Midterm 1 Answers

381 Econ 381 Fall 2009 Midterm 1 Answers - Econ 381 Fall...

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Multiple Choice Questions (50 Points) 1. Use the classical model for a closed economy, but assume that consumption decreases, other things being equal, when the real interest rate rises. If there is a technology that leads to an increase in investment demand: a. investment increases and the interest rate rises b. investment is unchanged and the interest rate rises c. investment and the interest rate are both unchanged d. investment decreases and the interest rate rises Answer: a 2. An example of increasing returns to scale is when capital and labor inputs: a. both increase 10 percent and output increases 5 percent b. both increase 10 percent and output increases 10 percent c. both increase 5 percent and output increases 10 percent d. do not change and output decreases 5 percent Answer: c 3. In a classical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would: a. still crowd out exactly $10 billion of investment b. crowd out between zero and $10 billion of investment c. not crowd out any investment d. crowd out more than $10 billion of investment Answer: b 4. The ex post real interest rate will be greater than the ex ante real interest rate when the: a. rate of inflation is increasing b. rate of inflation is decreasing c. actual rate of inflation is greater than the expected rate of inflation d. actual rate of inflation is less than the expected rate of inflation Answer: d 5. Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment: a. will rise and small country investment will fall b. will rise and small country investment will remain unchanged c. will remain unchanged and small country investment will fall d. and small country investment will both remain unchanged Answer: c 6. If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is _____ Swiss goods per U.S. good. a. 0.5
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381 Econ 381 Fall 2009 Midterm 1 Answers - Econ 381 Fall...

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