Winter 2011 Midterm 2 Answers

The government wants to keep the spending multiplier

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Unformatted text preview: tonomous variables remain the same). The government wants to keep the spending multiplier the same. What must it set the new income tax rate to? a. 0% b. 25% c. 33.33% d. 75% 12. Political instability in the Middle East temporarily interrupts the supply of oil to the United States. Which of the following is most likely to occur? a. The short-run aggregate supply curve experiences a positive shock, output increases, and prices decrease. b. The short-run aggregate supply curve experiences a negative shock, output decreases, and prices increase. c. The aggregate demand curve experiences a negative shock, output decreases, and prices decrease. d. The aggregate demand curve experiences a positive shock, output increases, and prices increase. 13. The economy is initially in a long run AD-AS equilibrium with P = 8 and rGDP = 24. The equation for the AD curve is given by rGDP = 192/7 – (3/7)*P, and the short run AS is characterized by perfectly sticky prices. Suppose now that a financial crisis happens so that at any given price level, the AD curve shifts leftward by 13. What is the new short run rGDP? a. 11 b. 18 c. 24 d. 37 Page 3 of 11 14. Consider an economy whose potential (long-run) output = $100 while current (short-run) output = $140. MPC = 0.8, income tax t = 0.2, and the nominal interest rate r = 8.5%. Which of the following is the best description of the economy today, and the changes that will occur in the future? a. The economy has a recessionary gap, so the high MPC should cause the nominal wage to rise until the recession is over. b. The economy has a recessionary gap, so the government will automatically increase spending to raise the interest rate and crowd out investment. c. The economy is operating at equilibrium, so nominal wages and interest rates should remain unchanged. d. The economy has an inflationary gap, so there is a natural increase in the nominal wage rate as more workers are hired. 15. All of the following are examples of automatic stabilizers EXCEPT: a. the economy falls into a depression and government Medicaid transfers increase as mo...
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This note was uploaded on 06/12/2012 for the course ECON 102 taught by Professor Rossana during the Spring '08 term at University of Michigan.

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