PS3sp08

PS3sp08 - Problem Set 3 Due date: March 26, 2008 at the...

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1 Problem Set 3 Econ 320 – 001, Spring 2008 Due date: March 26, 2008 at the beginning of class There are 30 questions (25 multiple choice and 5 short answer) in this problem set. Submit your answers by the beginning of the class on Wednesday March 26, 2008. For the Multiple Choice section: mark your answers (and submit) on an official UNC scantron sheet. Make sure to fill in your name and your student ID number. You can pick up a scantron sheet at the checkout counters of the Student Stores and campus snackbars. For the Short Answer section: please write out and submit on your own paper the answers to these questions. You must show your work (calculations, derivations, reasoning) in order to receive full credit. Make sure to print your name on the paper and sign the honor Pledge affirming that you have neither given nor received unauthorized aid on this assignment and have complied with all of the rules of this assignment. I. Multiple Choice 1. In the 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) increases; increase; increases; increase C) decrease; decrease; increase; increase D) increase; increase; decrease; decrease 2. If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400. 3. The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the interest rate is fixed whereas in the IS-LM model it is allowed to vary. 4. In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls
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2 5. In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income. A) buy; rises; increase
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PS3sp08 - Problem Set 3 Due date: March 26, 2008 at the...

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