Worksheet

Part I: Multiple choice questions

1. What does the LM curve represent in the IS–LM model?

a) Equilibrium in the goods market
b) Equilibrium in the money market
c) Aggregate supply in the short run
d) Fiscal policy effects
2. If the government increases taxes, what is the expected shift in the IS curve?
a) Rightward
b) Leftward
c) No shift
d) Upward
3. If aggregate demand (AD) increases along the upward slopping part of the short run
aggregate supply (SRAS) curve, what happens to the economy?

A. Both price level and output increase.

B. Price level rises but output remains unchanged.
C. Output increases but price level remains unchanged.
D. Both price level and output decrease.

4. Which of the following is not a source of long run economic growth?

A. Labour growth. B. Capital Accumulation. C. Technological progress. D. None.

5. If a country has a trade surplus, which of the following is true?

A. It is a net lender and hence has a capital account deficit.

B. It is a net borrower and hence has a capital account deficit.
C. It is a net borrower and hence has a capital account surplus.
D. It cannot be determined.

6. Which of the following cannot be used by the central bank to influence the money
supply?
A. Open market operations (OMO).
B. Reserve requirements.
C. Technology.
D. D. None.

7. Which of the following is NOT a function of money?

a)Medium of exchange
b) Unit of account
c) Store of value
d) Tool for investment

8. What is the primary difference between commodity money and fiat money?
a) Commodity money is made of paper, while fiat money is made of metal.
b) Commodity money has intrinsic value, whereas fiat money does not.
c) Commodity money is backed by the government, while fiat money is not.
d) Commodity money is less durable than fiat money.

9. What is the relationship between the real exchange rate and net exports?
a) Positive
b) Negative
c) No relationship
d) Perfectly elastic

10. Which of the following causes the SRAS curve to shift to the left?
a) Technological advancements
b) An increase in input costs (e.g., wages or raw materials)
c) A decrease in taxes on production
d) Improved business confidence

11. Sticky prices are caused by:

a) Immediate adjustments in labor and input costs
b) Long-term contracts between firms and customers
c) Perfectly competitive markets
d) Rapid changes in the price level
12. The Phillips Curve demonstrates a tradeoff between:
a) Inflation and unemployment
b) Inflation and output
c) Output and interest rates
d) Government spending and taxes

13. In an open economy, net exports (NX) are positive when:

a) Savings exceed investment.
b) Investment exceeds savings.
c) Government spending exceeds taxes.
d) Consumption exceeds output.

14. A trade surplus implies:

a) Savings are less than investment.
b) Net capital outflow is positive.
c) The real exchange rate is high.
d) Domestic spending exceeds output.

15. Which of the following causes the real exchange rate to depreciate?
a) An increase in foreign prices.
b) A decrease in domestic prices.
c) An increase in the nominal exchange rate.
d) A reduction in net exports.

16. The IS curve represents equilibrium in:

a) The money market
b) The goods market
c) The labor market
d) The capital market

17. How much government spending (ΔG) would be needed to raise output by 100 million if
the MPC is 0.5?
A) 25 million B) 40 million C) 33.3 million D) 50 million E) None
18. Which of the following shifts the IS curve to the right?
a) Increase in taxes
b) Decrease in government spending
c) Increase in investment due to lower interest rates
d) Increase in money supply

19. In an open economy, a trade surplus occurs when:

a) S>I
b) S<I
c) NX=0
d) G >T

20. In the short run, aggregate supply slopes upward because:

a) Prices are flexible.
b) Output increases when prices rise.
c) Demand determines the natural level of output.
d) Sticky wages and prices slow adjustment to equilibrium

21. A real exchange rate measures:

a) The relative price of currencies between two countries.
b) The quantity of foreign goods a domestic good can buy.
c) The nominal price of a currency.
d) Capital flows between two countries.

22. A decrease in taxes causes:

a) A leftward shift in the IS curve
b) A rightward shift in the IS curve
c) A movement along the LM curve
d) No effect on the IS curve

23. What happens to equilibrium income in the Keynesian Cross model if government
spending increases by $100 billion and MPC=0.8?
a) Income rises by $100 billion
b) Income rises by $200 billion
 c) Income rises by $400 billion
d) Income rises by $500 billion

24. Which of the following is not a type of financial asset?

A. Sole proprietorship. B. Bond. C. Derivatives. D. Stocks. E. None

Part II: True or false

1. In an open market operation, the central bank changes the supply of money by buying or
selling bonds in the bond market.

2. Suppose investment is exogenously fixed. All else equal, if saving increases due to a
decline in autonomous consumption, then equilibrium output must decrease.
3. The business cycle is so named because upswings and downswings in business activity
are equal in terms of duration and intensity.
4. Inflation is bad for the economy because goods and services are more expensive.
5. When the economy is operating at its potential level of output, there cannot be
unemployment.
6. The recessionary gap causes unemployment and lost output.
7. It could be a trade balance deficit while there is a general equilibrium
8. Consumer price index understates inflation because it reflects the ability of consumers to
substitute toward goods whose relative prices have fallen.
9. If marginal propensity to consume increases from 0.75 to 0.9, autonomous consumption
will increase.
10. If the central bank increases required reserve ratio, money supply increases.
11. In a barter economy, the double coincidence of wants is required for transactions to
occur.

12. Paper currency was initially redeemable for precious metals like gold and silver.
 Part III: Short answers and essay type questions

1. ____________________ is a money demand motive to take advantage of higher expected

interest rate

2. Define the IS curve and explain its significance in the IS–LM model.

3. Explain the theory of liquidity preference and its role in deriving the LM curve.

4. Discuss how fiscal policy shifts the IS curve. Provide an example.

5. Differentiate between the short-run and long-run aggregate supply curves.

6. Discuss the importance of sticky prices in determining the slope of the short-run
aggregate supply curve

7. Differentiate between the nominal and real exchange rates. Why is the real exchange rate
more important for trade?

8. Differentiate between sticky-price and imperfect information price models in explaining

why short-run aggregate supply curve (SRAS) is upward sloping

9. Explain the short-run tradeoff between inflation and unemployment as represented by the
Phillips Curve. Discuss how policymakers can use this tradeoff to stabilize the economy
during a recession

10. Define the short-run aggregate supply (SRAS) curve and explain why it is upward
sloping.

11. What are the key differences between the short-run aggregate supply (SRAS) and the
long-run aggregate supply (LRAS) curves?

12. Discuss the role of sticky prices in determining the slope of the SRAS curve.

13. Explain how a positive supply shock, such as technological advancement, shifts the
SRAS and LRAS curves.

14. What is the Phillips Curve, and how is it derived from the SRAS curve?
 15. Define the IS–LM model and explain its purpose in analysing macroeconomic
equilibrium.

16. What is the Keynesian Cross? How does it help derive the IS curve?

17. Explain the relationship between actual expenditure and planned expenditure in the
Keynesian Cross model.

18. What is the government spending multiplier, and how does it affect equilibrium output?

19. Describe the theory of liquidity preference and its role in deriving the LM curve.

20. Discuss how fiscal policy shifts the IS curve.

21. Explain the concept of sticky prices and its importance in the short

Part IV: Work out(show the steps)

1. Given a closed economy IS-LM Model:

C=200+0.8(Y−300), I=500−40r, G=400, T=300

d
And M / P =0.25Y−50r , Ms= 600 (nominal money supply) Price level (P) = 2

a) Derive the IS curve equation.

b) Derive the LM curve equation.
c) Solve for equilibrium Y and r
2. Derive the government spending multiplier in a closed economy with c=0.75

3. In an open economy with marginal propensity to consume, c=0.8 and marginal propensity
to import m=0.2
a) Calculate the government spending multiplier.
b) Determine the tax multiplier.