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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
ISLM
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 lumpsum 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
ISLM
model than it is in the Keynesiancross model is that the Keynesiancross model
assumes that:
A) investment is not affected by the interest rate whereas in the
ISLM
model fiscal
expansion raises the interest rate and crowds out investment.
B) investment is not affected by the interest rate whereas in the
ISLM
model fiscal
expansion lowers the interest rate and crowds out investment.
C) investment is autonomous whereas in the
ISLM
model fiscal expansion encourages
higher investment, which raises the interest rate.
D) the interest rate is fixed whereas in the
ISLM
model it is allowed to vary.
4. In the
ISLM
model when
M
rises but
P
remains constant, in shortrun 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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5. In the
ISLM
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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 Fall '08
 NEDITA

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