ECN 1b Midterm 2 key

ECN 1b Midterm 2 key - Midterm Examination 2, ECN 1B,...

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Page 1 of 12 Midterm Examination 2, ECN 1B, Spring 2010, B. Modjtahedi There are 30 multiple choice questions in the exam Question 1. Which event led to the development of the New Classical Economics? A. Industrial revolution and the rise of capitalism. B. The Great Depression C. Stagflation of 1970s. D. The financial crisis of 2007-08. E. None of the above. Question 2. Which of the following statements is most accurate? A. Adam Smith believed that greed and the pursuit of self interest by individuals would lead to the collapse of capitalism. B. According to John Maynard Keynes, it is not true that individuals always act in their own best interest. C. According to Milton Friedman, money is not the root cause of inflation. D. Eugene Fama’s hypothesis is that financial markets are not capable of processing information efficiently. E. None of the above. Question 3. Consider the savings and investment functions shown in the graph above. The government is currently running a budget deficit of 100 units. Marginal propensity to consume is 0.80. Suppose 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 0 100 200 300 400 500 600 700 800 900 1,000
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Page 2 of 12 that to stimulate the economy the government reduces taxes by 500 units without reducing its outlays. What will be the effect of this tax cut on aggregate demand? A. It will increase by 400 units B. It will increase by 2,000 units C. It will decrease by 200 units D. It will decrease by 100 units E. None of the above. Question 4. Consider the hypothetical loanable funds market shown in the graph above. The graph shows that demand for loanable funds is totally insensitive to changes in the interest rate. The government increases its budget deficit by $200. What will be the effect of this event on household consumption, ceteris paribus ? A. It will increase by $100. B. It will increase by $200. C. It will decrease by $100. D. It will decrease by $200. E. None of the above. Question 5. Which of the following statements is most accurate concerning the crowding-out effect of an increase in budget deficits? A. Investment spending will be crowded out more, if the savings function is more interest sensitive. 0% 1% 2% 3% 4% 5% 6% 7% 8% $0 $100 $200 $300 $400 $500 $600 $700 $800
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Page 3 of 12 B. Consumption spending will be crowded out more, if the savings function is more interest sensitive. C. Consumption spending will be crowded out less, if the savings function is more interest sensitive. D. Investment spending will be crowded out less, if the savings function is less interest sensitive. E. None of the above. Question 6. The government increases its spending (G) and finances it through an equal amount of increase in taxes. According to the loanable funds theory , what will be the effect of this policy on the interest rate, ceteris paribus ? A. It will increase because of the increase in government spending.
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ECN 1b Midterm 2 key - Midterm Examination 2, ECN 1B,...

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