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: a. 0 b. 100 c. 150 d. 250 3. Along an IS curve all of the following are always true except: a. planned expenditures equal actual expenditures b. planned expenditures equal income c. the demand for real balances equals the supply of real balances d. demand and supply of loanable funds are equal 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. a. decrease, decrease, decrease, decrease b. increase, increase, increase, increase c. decrease, decrease, increase, increase d. increase, increase, decrease, decrease 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: a. decrease but the money supply falls and income falls b. increase, the money supply increases, and income increases c. are unchanged, but the money supply falls and income falls d. are unchanged, the money supply is unchanged, and income is unchanged 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). Draw the Keynesian-cross diagram making sure to label it correctly.
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This note was uploaded on 04/07/2011 for the course ECON 381 taught by Professor Staff during the Winter '08 term at BYU.

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

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