The International College of Economic and Finance
MACROECONOMICS
Mock Exam – 2 May, 6, 2006
Name ______________________________ group __________________
SECTION 1
Time – 70 minutes
1. Which of the following is most likely to cause an immediate rise in domestic nominal interest rates?
(A) Announcement of a favorable trade balance
(B) News that creates anticipation of increased inflation
(C) A central-bank purchase of government securities
(D) A decrease in bank-reserve requirements
(E) A decrease in demand for new housing
2. If a central bank sells government securities to other banks, the immediate result is
(A) a decrease in the level of short-term interest rates
(B) a decrease in bank reserves
(C) an increase in the national debt
(D) an increase in the amount of currency held by the nonbank public
(E) all of the above
Questions 3-4 relate to a country that is in the midst of a recession brought about by a shortfall of private-sector aggregate demand. The country maintains a fixed exchange rate, and balances of payments on both current and capital accounts are in deficit.
3. If the country attempted to end the recession by an increase in the level of government spending financed by a sale of government bonds to the public, how would the balance-of-payments deficit be affected?
(A) The overall balance-of-payments deficit would definitely be reduced.
(B) The overall balance-of-payments deficit would not be affected.
(C) The overall balance-of-payments deficit would definitely be increased.
(D) The current-account deficit would become larger and the capital-account deficit would become smaller.
(E) The current-account deficit would become smaller and the capital-account deficit would become larger.
4. If the country attempted to end the recession by increasing the supply of money, how would the balance-of-payments deficit be affected?
(A) It would definitely be reduced.
(B) It would not be affected.
(C) It would definitely be increased.
(D) The current-account deficit would become larger and the capital-account deficit would become smaller.
(E) The current-account deficit would become smaller and the capital-account deficit would become larger.
5. Under a system of fixed exchange rates, which of the following would be most likely to result in an increase in the deficit in a country's balance of payments?
(A) A period of domestic price deflation
(B) An expansionary domestic monetary policy
(C) A recession at home with prosperity abroad
(D) A reduction in the level of government spending
(E) An increase in personal and business income-tax rates
6. If Japan currently is pegging the yen in the foreign-exchange market and has an overall balance-of-payments deficit, which of the following is true?
(A) Japan is selling more commodities, services, and securities to foreigners than foreigners are selling to Japan.
(B) Japanese official reserves are rising.
(C) The Japanese central bank is buying yen on the foreign-exchange market.
(D) The current dollar price of yen would be higher if Japan were on floating exchange rates.
(E) The demand for yen exceeds the supply of yen on the foreign exchange market.
7. Suppose that real GDP is $20 trillion and the unemployment rate is 5.5%. If, over the next year, potential output grows by 2.5 percent and the unemployment rate increases by 1 percentage point to 6.5%, real GDP will increase to
(A) $20.5 trillion. (B) $20.2 trillion. (C) $21 trillion. (D) $21.4 trillion. (E) $22 trillion.
8. Which of the following would not increase labor's productivity?
(A) technological progress
(B) more natural resources
(C) an increase in the capital/labor ratio
(D) an increase in the population growth rate
(E) all of the above will increase labor's productivity
9. Which of the following is a stock variable?
(A) capital services
(B) rate of unemployment
(C) saving
(D) depreciation
(E) public deficit
10. If government spending increases, the aggregate supply (AS) curve will
(A) shift in
(B) remain constant
(C) shift out
(D) change slope and become flatter
(E) change slope and become steeper
11. In the long run an increase in government spending will
(A) increase nominal output
(B) change the composition of output
(C) cause full crowding out
(D) raise tax revenues
(E) all of the above
12. Which of the following constitute expansionary fiscal policy, except
(A) an increase in the benefits paid to welfare recipients
(B) a decrease in the capital gains tax
(C) an increase in the number of available tax exemptions
(D) an increase in the inheritance tax
(E) a government defense expenses
13. When we graph AD, all the variables are hold constant, except:
(A) taxes,
(B) government transfers,
(C) government spending,
(D) money supply,
(E) investment.
14. Suppose that an economy initially at full-employment is hit by an adverse supply shock. What will happen to output and the price level in the long run?
(A) Output will fall and the price level will rise.
(B) Output will fall and the price level will not change.
(C) Output will not change and the price level will rise.
(D) Both output and the price level will not change.
(E) Output and the price level will fall.
15. Anticipated inflation transfers wealth from
(A) creditors to debtors
(B) poor to rich
(C) workers to firms
(D) debtors to creditors
(E) none of the above
16. An unemployed person is likely to turn down a job offer if the wage they are offered is below their
(A) replacement ratio
(B) experience rating
(C) reservation wage
(D) sacrifice ratio
(E) previous wage
17. If the mpc = 0.8 and there is a $0.375 tax levied on each dollar of income, a $40 increase in government purchases will cause the budget surplus to
(A) increase by $10
(B) increase by $40
(C) decrease by $10
(D) decrease by $40
(E) decrease by $20
18.Which of the following variables are exogenously determined in the Keynesian Cross model?
(A) income
(B) consumption
(C) output
(D) investment
(E) imports
19. Which of the following variables can shift the AEP curve?
(A) price level
(B) government spending
(C) money supply
(D) interest rate
(E) all of the above
20. A lower money supply leads to
(A) higher income
(B) higher prices
(C) higher employment
(D) higher interest rate
(E) none of the above
21. An increase in the mpc will
(A) make the leakages curve steeper
(B) shift the leakages curve outward
(C) make the leakages curve flatter
(D) shift the leakages curve inward
(E) have no effect on the leakages curve
22. When investment is very sensitive to the interest rate
(A) the more effective will be fiscal policy
(B) the more effective will be monetary policy
(C) the more effective will be both fiscal and monetary policy
(D) the less effective will be both fiscal and monetary policy
(E) have no effect on the effectiveness of either fiscal or monetary policy
23. A combination of contractionary fiscal policy and expansionary monetary policy
(A) raises unemployment, lowers investment
(B) raises unemployment, can't predict effect on investment
(C) raises investment, lowers unemployment
(D) raises investment, can't predict effect on unemployment
(E) doesn’t change investment, lowers unemployment
24. An economy is in internal balance when (the)
(A) balance of payments surplus is zero
(B) domestic interest rates = foreign ones
(C) output equals potential output
(D) current account = the capital account
(E) budget is balanced
25. An increase in foreign income will cause a country's
(A) exports to rise
(B) imports to rise
(C) exports to fall
(D) imports to fall
(E) true answers are (a) and (b)
26. Which of the following transactions will increase the US's balance of payments, except
(A) The sale of 2 airplanes to Greece.
(B) The sale of 3,000 shares of General Motors stock to investors abroad.
(C) The purchase of 1,000,000 acres of the Brazilian rainforest by US conservationists.
(D) The sale of Rockefeller Center to Japanese investors.
(E) The purchase of a haircut and a manicure in the US by a German tourist.
27. If an economy has a marginal propensity to consume of 0.9 and there is an income tax (t) of 0.25, and if its imports (Im) and exports (Ex) are given by the functions: Im = 
+ 0.1Y, Ex = 
the $20 increase in exports will increase output by:
(A) $200 (B) $180 (C) $100 (D) $80 (E) $50
28. Money supply increases if there is an increase in
(A) inflation
(B) public's desire to hold currency instead of deposits
(C) amount of excess reserves that banks hold
(D) income
(E) no true answer
29. Which of the following does not make it difficult for policymakers to stabilize output with fiscal policy?
(A) long inside lag
(B) multiplier uncertainty
(C) short outside lag
(D) long decision lag
(E) budget deficit
30. If the nominal money supply is growing at 6% a year, output is growing at 2% a year, and the money base is fixed at $100 billion, how large will inflation tax revenues be?
(A) $60 billion (B) $20 billion (C) $6 billion (D) $4 billion (E) 0
31. A central bank is most likely to monetize budget deficits if it targets
(A) interest rates
(B) inflation
(C) the money base
(D) exchange rate
(E) it doesn't matter
32. Which of the following is a debit to the U.S. current account?
(A) Purchase of a new U.S-made automobile by an Argentinean citizen
(B) Purchase of a 1940s beach house in NEW Jersey by a citizen of India
(C) Sale of foreign official assets by the Fed to the central bank of Switzerland
(D) Purchase of oil from the Saudi Arabia by a U.S. company
(E) Payments for the use of farm land in the U.S. by a citizen of Tanzania
33.On which of the following are monetarists and supply-side economists most likely to disagree?
(A) Whether increases in labor productivity increase real output
(B) Whether changes in monetary policy affect the international value of the dollar
(C) Whether implementing a monetary rule would be an effective economic policy
(D) Whether the level of investment depends on the interest rate
(E) Whether an expansionary fiscal policy will lead to an increase in interest rates
34. If the value of the United States dollar depreciates in relation to the Japanese yen, which of the following will most likely happen?
(A) A Japanese candy bar that formerly cost 250 yen in Japan will cost less in Japan.
(B) A United States candy bar that formerly cost $250 in the United States will cost less in the United States.
(C) Japanese tourists in the United States will be able to buy the same amount of goods and services for fewer yen.
(D) American tourists in Japan will be able to buy the same amount of goods and services for fewer dollars.
(E) United States importers will be able to obtain more Japanese goods for fewer dollars.
35.Deficit spending by the government may result in crowding out of the net exports because the spending
(A) reduces the funds available for private investment
(B) is usually financed by selling bonds to foreign banks
(C) lowers the interest rate and thus discourages saving
(D) leads to higher employment
(E) increases the international value of the dollar
36.The different ranges of the aggregate supply curve shown in the graph above best reflect which of the following?
(A) Alternative consumer purchasing decisions
(B) Changes in technology
(C) The relative combinations of monetary and fiscal policy
(D) The existence of long-run economic growth
(E) The amount of excess capacity in the economy
37.An increase in the velocity of money in the United States means that
(A) the government is printing more money than previously
(B) firms are spending less on capital goods
(C) foreigners are holding more dollars in Eurodollar accounts
(D) exports have risen relative to imports
(E) national income has risen relative to the money supply
38. A positive GDP gap exists when
(A) nominal GDP is greater than real GDP,
(B) real GDP is greater than potential GDP,
(C) economic activity is lower than its full-employment level
(D) economic activity exceeds its full-employment level
(E) there is no involuntary unemployment
39. Aggregate demand is inversely related to the price level because an increase in the price level
(A) lowers the rate of interest, which results in a higher level of aggregate spending,
(B) has a negative effect upon wealth, which results in increased aggregate spending,
(C) dampens exports and increases imports, which results in a lower level of aggregate spending,
(D) causes government spending to decline, which results in a lower level of aggregate spending,
(E) causes nominal money supply to fall, which results in a lower level of aggregate spending.
40. Which of the following will not result in a shift by an aggregate demand curve?
(A) There is an increase in government spending, ceteris paribus.
(B) There is an increase in gross imports, ceteris paribus.
(C) There is an increase in the rate of interest, ceteris paribus.
(D) There is an increase in the price level.
(E) There is an increase in taxes, ceteris paribus.
41. All the following statements are true, except:
(A) Aggregate demand shifts upward to the right when government reduces income taxes.
(B) A depreciation of the U.S. dollar causes the aggregate demand curve for the United States to shift downward to the left.
(C) Not all economists agree that an increase in aggregate demand will result in an increase in both the price level and real output.
(D) An increase in the cost of raw materials or economic resources, ceteris paribus, results in an increase in the price level and a decrease in real output.
(E) A classical aggregate supply curve shows that output is inelastic to the price level.
42. In the short run, increases in the nominal wage are associated with
(A) movement up a Phillips curve,
(B) an outward shift of the Phillips curve,
(C) a decrease in the rate of unemployment,
(D) increased likelihood of demand-pull inflation.
(E) fall in business confidence
43. The existence of a natural rate of unemployment suggests that
(A) nominal wage increases lag price increases in the long run,
(B) nominal wage increases lead price increases in the long run,
(C) the short-run Phillips curve is steeper than the long-run Phillips curve,
(D) there is no inflation-unemployment trade-off in the long run,
(E) there are money illusions in the long run.
44. According to Malthusian population theory, in the long run output per capita
(A) tends toward the subsistence level,
(B) increases at an increasing rate,
(C) increases at a decreasing rate,
(D) does not change.
(E) grows at arithmetic progression
45. Under a freely-flexible-exchange-rate system, a deficit in a nation's balance of payments is corrected by
(A) a decrease in the domestic currency price of the foreign currency,
(B) an appreciation of domestic currency,
(C) a depreciation of the domestic currency,
(D) a depreciation of the foreign currency,
(E) central bank’s interventions
46. Suppose the full-employment level of output is $680, the equilibrium level of output is $600, the MPC is 0.80, and there is a 0.25 income tax. Full-employment output can be achieved by a
(A) $20 decrease in taxes,
(B) $25 increase in government spending,
(C) $30 decrease in taxes,
(D) $40 increase in government spending
(E) $40 decrease in taxes
47. A recessionary gap exists when
(A) aggregate supply exceeds aggregate demand,
(B) the aggregate spending line intersects the 45° line at an output level to the right of the full-employment level of output,
(C) the aggregate spending line intersects the 45° line at an output level to the left of the fully employment level of output,
(D) the aggregate spending line intersects the aggregate supply curve at a lower price level,
(E) the aggregate spending line intersects the aggregate supply curve at a higher price level
48. The paradox of thrift maintains that a society's desire to save more
(A) lowers the equilibrium level of output and has no effect upon the amount saved,
(B) lowers the equilibrium level of output and the amount saved,
(C) lowers the equilibrium level of output and increases the amount saved,
(D) has no effect upon the equilibrium level of output and increases the amount saved,
(E) increases the equilibrium level of output and the amount saved.
49. Suppose banks hold no excess reserves and reserves total $1200. When the reserve requirement is lowered from 0.12 to 0.10, check-writing deposits
(A) increase from $1000 to $1200,
(B) increase from $10,000 to $12,000,
(C) decrease from $1200 to $1000,
(D) decrease from $ 12,000 to $ 10,000.
(E) increase by $1200
50. If the Ml money supply is $400, velocity is 4, and there is a 10% growth in the money supply and a 25% increase in velocity, nominal GDP should increase from
(A) $1200 to $1600,
(B) $1600 to $1760,
(C) $1600 to $2200,
(D) $1760 to $2200,
(E) $1200 to $1760.
51. Cost-push inflation exists when
(A) consumers use their market power to push up prices,
(B) resource owners use their market power to push up prices,
(C) potential output is growing faster than real GDP,
(D) real GDP is increasing faster than potential GDP
(E) all of the above.
52. Personal income
(A) is income received by individuals during a given year,
(B) is the income individuals have available for spending during a given year,
(C) equals national income less indirect taxes,
(D) is the sum of wages plus interest received by individuals during a given yea
(E) equals consumption plus saving.
53. Gross national product equals Gross domestic product plus
(A) net indirect taxes;
(B) net current transfers from abroad
(C) net foreign factor income;
(D) net exports;
(E) none of the above.
54. Which of the following results in an increase in the value of the dollar:
(A) Interest rates in the United States decrease.
(B) Interest rates in foreign countries increase.
(C) Price level in the United States increases.
(D) Productivity in the United States increases.
(E) Output in the United States increases.
55. As a measure of economic welfare, gross domestic product underestimates a country's production of goods and services when there is an increase in
(A) The production of antipollution devices
(B) Crime prevention services
(C) The production of military goods
(D) Household production
(E) Legal services
56. When the economy is initially at a position of internal and external equilibrium, exchange rates are flexible, and domestic and foreign financial assets are perfect substitutes, an increase in government spending causes external imbalance and
(A) A decrease in autonomous net exports as the dollar appreciates
(B) A decrease in autonomous net exports as the dollar depreciates
(C) An increase in autonomous net exports as the dollar appreciates
(D) An increase in autonomous net exports as the dollar depreciates
(E) A necessitates to the central bank to increase official reserves
57. Which of the following is NOT a component of national income?
(A) wages of workers
(B) salaries of civil servants
(C) corporate profits
(D) rental income
(E) all of the above are components of national income
58. If imports exceed exports, we know with certainly that:
(A) GNP exceeds GDP
(B) GDP exceeds GNP
(C) a budget deficit exists
(D) a trade surplus exists
(E) net foreign investment is negative
59. Suppose a bond pays $1000 in one year. If the price of the bond is $800, we know that the interest rate on this bond is:
(A) 8% (B)12.5% (C) 20% (D) 25% (E) 33%
60. A country experiences a rate of wage inflation twice that of its international competitors. At the same time, its currency appreciates because of an inflow of capital funds. Which of the following is most likely to occur?
(A) A decrease in money supply
(B) A decrease in the rate of unemployment
(C) A decrease in profits
(D) An increase in the volume of exports
(E) An increase in government spending
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