Principles of Macroeconomics (ECO1104)

Assignment 5

1. According to the liquidity preference theory, an increase in the overall price level of 10 percent
a. increases the equilibrium interest rate, which in turn decreases the quantity of goods and
services demanded.
b. decreases the equilibrium interest rate, which in turn increases the quantity of goods and
services demanded.
c. increases the quantity of money supplied by 10 percent, leaving the interest rate and the
quantity of goods and services demanded unchanged.
d. decreases the quantity of money demanded by 10 percent, leaving the interest rate and the
quantity of goods and services demanded unchanged.

Figure 1

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2. Refer to Figure 1. If the current interest rate is 2 percent,
a. there is an excess supply of money.
b. people will sell more bonds, which drives interest rates up.
c. as the money market moves to equilibrium, people will buy more goods.
d. the quantity of money supplied is greater than the quantity of money demanded.

Figure 2

3. Refer to Figure 2. Which of the following events could explain an increase in the equilibrium
interest rate from r1 to r3?
a. A increase in the price level
b. A increase in the number of firms building new factories and buying new equipment
c. An decrease in the price level
d. An decrease in the number of firms building new factories and buying new equipment

4. Refer to Figure 2. Suppose the current equilibrium interest rate is r2. If the Federal Reserve
increases the money supply, and the price level does not change,
a. there will be an increase in the equilibrium quantity of goods and services demanded.

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 b. there will be a decrease in the equilibrium quantity of goods and services demanded.
c. there will be an increase in the equilibrium interest rate.
d. fewer firms will choose to borrow to build new factories and buy new equipment.

Figure 3

(a) The Money Market (b) The Aggregate Demand Curve

5. Refer to Figure 3. Suppose the multiplier is 5 and the government increases its purchases by $15
billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the
AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance
between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level
of the price level, is
a. $75 billion.
b. $40 billion.
c. $30 billion.
d. $20 billion.

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Scenario 1. The following facts apply to a small economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.

6. Refer to Scenario 1. In response to which of the following events could aggregate demand
increase by $1,500?
a. A stock-market boom stimulates consumer spending by $300, and there is an operative
crowding-out effect.
b. A stock-market boom stimulates consumer spending by $550, and there is a small
operative crowding-out effect.
c. An economic boom overseas increases the demand for U.S. net exports by $550, and there
is no crowding-out effect.
d. An economic boom overseas increases the demand for U.S. net exports by $300, and there
is no crowding-out effect.

7. If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the
marginal propensity to consume is
a. 0.2 and the multiplier is 1.25.
b. 0.8 and the multiplier is 5.
c. 0.2 and the multiplier is 5.
d. 0.8 and the multiplier is 8.

8. If policymakers expand aggregate demand, then in the long run

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9. The government of Blenova considers two policies. Policy A would shift AD right by 500 units
while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A
will lead
a. to a lower unemployment rate and a lower inflation rate than policy B.
b. to a lower unemployment rate and a higher inflation rate than policy B.
c. to a higher unemployment rate and lower inflation rate than policy B.
d. to a higher unemployment rate and higher inflation rate than policy B.

Figure 4

10. Refer to Figure 4. Suppose points F and G on the right-hand graph represent two possible
outcomes for an imaginary economy in the year 2020, and those two points correspond to points B
and C, respectively, on the left-hand graph. Then it is apparent that the price index equaled
a. 130 in 2019.
b. 115 in 2019.
c. 110 in 2019.
d. 100 in 2019.

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11. Suppose Congress repeals an investment tax credit that decreases the quantity of investment goods
that firms demand at any given interest rate. Which of the following would you expect to occur as a
result of this change?
a. In the short run, unemployment will decrease and inflation will rise.
b. In the short run, unemployment will decrease and inflation will fall.
c. In the short run, unemployment will increase and inflation will fall.
d. In the short run, unemployment will increase and inflation will rise.

Figure 5

12. Refer to Figure 5. If the economy starts at 5% unemployment and 5% inflation then if the Federal
Reserve pursues a contractionary monetary policy, in the short run the economy moves to
a. 3% unemployment and 5% inflation. In the long run the economy moves to 5%
unemployment and 5% inflation.
b. 3% unemployment and 5% inflation. In the long run the economy moves to 5%
unemployment and 3% inflation.
c. 7% unemployment and 3% inflation. In the long run the economy moves to 5%
unemployment and 5% inflation.
d. 7% unemployment and 3% inflation. In the long run the economy moves to 5%
unemployment and 3% inflation.

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Figure 6

13. Refer to Figure 6. A significant increase in the world price of oil could explain
a. the shift of the aggregate-supply curve from AS1 to AS2, but it could not explain the shift
of the Phillips curve from PC1 to PC2.
b. the shift of the Phillips curve from PC1 to PC2, but it could not explain the shift of the
aggregate-supply curve from AS1 to AS2.
c. both the shift of the aggregate-supply curve from AS1 to AS2 and the shift of the Phillips
curve from PC1 to PC2.
d. neither the shift of the aggregate-supply curve from AS1 to AS2 nor the shift of the
Phillips curve from PC1 to PC2.

14. Refer to Figure 6. A movement of the economy from point A to point B, and at the same time a
movement from point C to point D, would be described as
a. the outcome of a favorable supply shock.
b. falling inflation.
c. stagflation.
d. hyperinflation.

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15. Contractionary monetary policy
a. leads to disinflation and makes the short-run Phillips curve shift right.
b. leads to disinflation and makes the short-run Phillips curve shift left.
c. does not lead to disinflation but makes the short-run Phillips curve shift right.
d. does not lead to disinflation but makes the short-run Phillips curve shift left.