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381 Midterm 2 Test Answers

381 Midterm 2 Test Answers - Econ 381 Fall 2009 Matthew...

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Econ 381 Fall 2009 Matthew Butler Midterm II: IS-LM Answers Multiple Choice Questions (30 Points) 1. In the closed IS-LM model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income for a given r (i.e. holding r constant) by _____: a. $1 billion, more than $1 billion b. $0.75 billion, more than $0.75 billion c. $0.75 billion, $0.75 billion d. $1 billion, $1 billion 2. According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and taxes are both increased by 100, holding r constant equilibrium income will rise by: 3. Along an IS curve all of the following are always true except: 4. In the closed IS-LM model, a decrease in government purchases leads to a(n) _____ in planned expenditures, a(n) _____ in total income, a(n) _____ in money demand, and a(n) _____ in the equilibrium interest rate. 5. According to the Mundell-Fleming model (Open IS-LM), in an economy with floating exchange rates, expansionary fiscal policy causes net exports to _____ and expansionary monetary policy causes net exports to _____: a. increase, increase b. increase, decrease c. decrease, decrease d. decrease, increase 6. In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports: Page 1 of 6
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Short Answer Section (70 Points) : 7. (20 Points) Suppose that: C=400+4/5*(Y-T) T=250 G=200 I=100 EX=100 IM=MPM*Y=1/5*Y where MPM is the marginal propensity to import. The MPM is equal to the change in imports over the change in output (income).
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