Which of the following set of events would most likely reduce aggregate demand?

Other things being equal, the higher the price level, the lower the level of real output purchased. This occurs because of:

A. the wealth effect

B. consumer spending on capital goods

C. the full –employment unemployment rate

D. the sensitivity to demand-pull inflation

2. Which of the following set of events would most likely reduce aggregate demand?

A. a reduction in the excess capital of the existing capital stock

B. a reduction in business and personal tax rates

C. an increase in investment spending

D. an increase in personal income tax rates

3. Which of the following would most likely increase aggregate supply?

A. an increase in the prices of imported goods

B. an increase in productivity

C. a decrease in business subsidies

D. a decrease in net exports

Use the table below to answer question 4 – 7

National Income(GDP)

Consumption

Investment

Government Expenditure

0

400

50

50

500

800

50

50

1000

1200

50

50

1500

1600

50

50

2000

2000

50

50

2500

2400

50

50

3000

2800

50

50

3500

3200

50

50

4. The marginal propensity to consume is:

A.0.2

B. 0.4

C. 0.6

D. 0.8

5. The equilibrium level of national income is:

A. $2000

B. $2500

C. $3000

D. $3500

6. The equation for the consumption function is

A. C = -400 + 0.2Y

B. C = 400 + 0.2Y

C. C = 400 + 0.8Y

D. C = -400 + 0.8Y

7. At income level $2000, the economic activity of the economy:

A. is in equilibrium

B. will tend to expand

C. will tend to be contracting

D. may be expanding or contracting

8. Holding the money deposits of businesses and households and making loans to the public are the basic functions of:

A. the Reserve Bank

B. commercial banks and thrift institutions

C. Board of Governors of the Reserve Bank

D. Insurance Corporation

9. If you deposit $1 200 in a commercial bank which has an 18 percent reserve requirement, the bank will have increased:

A. required reserves by $216

B. excess reserves by $900

C. excess reserves by $1200

D. required reserves by $1 200

10. A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and then $2000 in cash is deposited in the bank, it can increase its loans by a maximum of:

A. $2000

B. $1250

C. $1500

D. $1000

11. The use of government spending and taxation for the purpose of stabilizing the economy is called:

A. exchange rate policy

B. monetary policy

C. fiscal policy

D. trade policy

12. Which of the following is true of contractionary fiscal policy?

A. the government budget is balanced

B. Aggregate demand increases.

C. the tax rate increases

D. a budget deficit occurs

13. In order to remove a given deflationary/recessionary gap, the government could –

A. decrease aggregate demand by budgeting for a deficit

B. increase aggregate demand by budgeting for a deficit

C. decrease aggregate demand by budgeting for a surplus

D. increase aggregate demand by budgeting for a surplus

14. The balanced-budget multiplier suggests that when taxes and government spending are increased by the same amount, there will be (hint: compare government expenditure multiplier and taxation multiplier formulas)

A. no change in the equilibrium level of output

B. a decrease in the equilibrium level of output

C. an increase in the equilibrium level of output

D. first an increase and then a decrease in the equilibrium level of output.

15. The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as (an)

A. law making lag

B. recognition lag

C. operational lag

D. impact lag

PART B: “TRUE or FALSE and WHY?” – Questions (10 marks)

Answer all questions and justify your answer. Each question is worth 2 marks.

An increase in business taxes will increase investment demand.

Answer True or False

Why?

The marginal propensity to consume shows the fraction of any level of total income that is consumed.

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