UNIVERSITY OF MADEIRA

Department of Management and Economics

INTRODUCTION TO MACROECONOMICS
2nd Semester 2004/2005

2nd EXERCISE NOTEBOOK

Study of Economic Cycles
1. THE PRODUCT MARKET
1.1. Simple Model

1. * The consumption function curve represents the relationship between:

a) the propensity to consume and the propensity to invest

b) the propensity to consume and taxes
c) private consumption and families' disposable income
d) investment and savings
e) none of the above

The keynesian consumption function describes the relationship between private consumption and:

permanent disposable income

private savings
current disposable income
d) a) e c)
e) none of the above

3. Variations in households' disposable income cause:

a) movements along the consumption function
b) changes in consumption function
c) changes in the savings function
d) b) e c)
e) a) and c)

4. * The marginal propensity to consume represents:

a) the variation in consumption per unit variation of disposable income
b) the ratio between consumption and income
c) the fraction of extra consumption that comes from the salary

d) the fraction of extra consumption coming from interest and dividends

e) none of the above

5. The marginal propensity to consume is given by the quotient between:

a) consumption and yield
b) variation in savings and variation in income
c) variation in consumption and variation in yield
d) variation in consumption and variation in savings

1
6. In a closed economy without a state and with exogenous investment, the marginal propensity to
consumption is given by the slope:
a) of the investment function
b) from the 45º line
c) of the consumption function

d) of the aggregate expenditure function

e) c) e d)

7. A change in the marginal propensity to consume in a given economy causes:

a) a movement along the savings function of this economy
b) a change in the consumption function of this economy
c) a movement along the consumption function of this economy
d) a) and c)
e) b) e c)

8. If consumption is 9000 and income is 10000, the marginal propensity to consume is:
a) 0.10
b) 0.90
c)9 1
d) Indeterminate

9. * Autonomous consumption is:

a) the extra consumption for obtaining an additional euro in income

b) the ratio between consumption and disposable income
c) the part of consumption that does not depend on disposable income
d) the extra savings that come from an additional euro of income
e) none of the above

10. We can define the autonomous part of the Keynesian consumption function as:
a) the portion of disposable income that is not consumed
b) the amount by which private consumption increases when disposable income
increase by one unit
c) the portion of private consumption that does not depend on disposable income
d) the value of private consumption for each unit of disposable income
e) none of the above

2
11. The marginal propensity to save is:
a) the amount of savings for each unit of disposable income
b) the autonomous part of the savings function
c) the portion of disposable income that is not consumed
d) the amount by which private savings change when disposable income varies
a unit
e) b) e c).

12. In a representative graph of the Keynesian consumption function where the horizontal axes
the vertical are exactly the same scale, if we draw a line that passes through
origin and with a 45º inclination, we say that there is savings whenever:
a) the representative line of the consumption function is above that line
b) the line representing the consumption function is below that line
c) the representative line of the function intercepts that line
d) b) e c)
e) none of the above

13. The Keynesian savings function:

a) is given by the vertical distance between the consumption function and the aggregate expenditure function

b) decreases when disposable income increases

c) is primarily determined by the interest rate
d) is given by the vertical distance between the 45º line and the consumption function

14. In a given economy, if the marginal propensity to consume (MPC) is 0.6,

regardless of disposable income, then the marginal propensity to save
(PMP) will be:
0.6
b) 1
0.4
d) the information is insufficient
e) none of the above

15. For an aggregate consumption function C= 50+ 0.8Y, the corresponding savings function

series
a)S= 50+ 0.2Y
b)S= −50+ 0.2Y
c)S= −50− 0.2Y
d)S= −50+ 0.8Y

3
16. In the calculation of total expenditure, which of the following items is not included in the expenses?

of investment:
a) Purchases of new capital goods
b) Purchase of new machines for an industry
c) Purchases of used capital goods
d) Purchases of new homes
e) None of the above

17. The components of aggregate expenditure in the simple Keynesian model without the State are:

a) private consumption and investment

b) consumption and savings
c) private consumption and public consumption
d) private consumption minus taxes and investment
e) none of the above

In a given economy without a state and without external relations, the behavior of

private consumption is given by the function C= C+ the investment cycle= I.

Graphically representing internal expenditure, which of the following occurrences does not

modify the curve that represents it:

a) the yield increases
b) consumption comes to depend solely on income
c) the marginal propensity to consume decreases
d) investment increases as a result of the improvement in business expectations
e) the marginal propensity becomes zero

19. The level of internal product of an economy, according to the Keynesian model without the State and

considering the closed economy, it depends:

a) of the level of autonomous consumption

b) of the investment level

c) of the marginal propensity to save
d) the marginal propensity to consume
e) of all the above

20. In the simple Keynesian model without State:

a) the real output is determined by the level of aggregate demand
b) as investment increases, the equilibrium income level decreases
c) the increase in investment causes a reduction in consumption
d) none of the previous statements is true

4
21. In the simple Keynesian model without the State, an increase in the marginal propensity to
consume, other things being equal, origin:

an increase in savings
b) a decrease in savings
c) there are no changes in savings
there is not enough information to respond
a reduction of the product

22. In the simple Keynesian model without the State, an increase in consumption leads to:

an increase in savings
b) a reduction in savings
c) no changes to the savings
the provided elements are not sufficient to answer the question

23. *As income increases, aggregate expenditure:

increases
b) decreases
c) remains the same
d) increases or decreases, depending on the variation in product prices
it increases or decreases, depending on events in the capital market

24. Considering the following graph, the autonomous spending is:

D Graph 2.1
16 45°
15
14
13
12
11 D
10
9
8
7
6
5
4
3
2
1
0

0 4 8 12 16
Y

8 million
b) It cannot be calculated from the graph
5 million
13 million

5
25. Based on the previous graph, and assuming that only consumption and savings are
induced by income, the marginal propensity to consume is:
0.375
b) 1
0.625
d) 0.5

26. In the Keynesian model, the notion of multiplier refers to:

a) to the impact of changes in endogenous aggregates on equilibrium values of
exogenous aggregates
b) to the impact of changes in exogenous aggregates on equilibrium values of
endogenous aggregates
c) to the multiple nature of the aggregate product measure
d) a) and c)

27. The greater the marginal propensity to consume:

a) the greater the value of the multiplier
the value of the multiplier will be lower
the greater the marginal propensity to save
d) the marginal propensity to save will be lower
e) items a) and d)

28. In the simple Keynesian model, the notion of the investment multiplier refers to
a) to the impact of changes in exogenous investment on income
b) on the impact of changes in income on exogenous investment
c) none of the above
d) a) and b) are correct

29. In a simple Keynesian model without the State, an increase in autonomous consumption by X

u.m./year:
a) increases the value of the multiplier in proportion to X
b) increases the product by the same amount it would have increased had it been the
exogenous investment increasing by X units/year
c) it results in an increase in total consumption of X units/year
it increases investment at a lower rate
e) b) e c)

6
30. In a simple Keynesian model, fluctuations in output resulting from changes in
investment
a) they do not exist if the multiplier is equal to 1
b) depend only on the size of the investment modifications
c) they will be greater the lower the marginal propensity to save
d) they decrease if the consumption function simultaneously shifts upward
e) will be smaller if the savings decrease when investment increases

31. In a certain closed Keynesian economy without a state, the consumption function is given

by the following expression: C= C+ cY, in which C> 0e0< c < 1.

a) What is the difference in behavior experienced by the marginal propensity to
to consume and the average propensity to consume in the hypothesis of a

i. positive variation of income;

ii. negative variation of income?
b) What conditions must be met for the marginal propensity to equal the propensity
average to consume?
c) Considering that the part of the income that is not consumed is saved, write the
analytical expression of the savings function.

∂C∂S
d) Explain why it is the case + = 1.
∂Y∂Y

32. Consider a closed Keynesian economy without a state, where private consumption is
given byC= C+ this is an investment for= I
a) Make the graphical representation of this model in the product-expense space.
b) Illustrate, in the graphic representation made, the following situations:
i. consumption comes to depend solely on income;
ii. the marginal propensity to consume decreases;
iii. an increase in investment.

33. Admit a situation where all income is consumed, whatever it may be.
level. Graphically represent the functions of private consumption and savings and explain them.
values of the respective average propensities.

34. *Consider that the consumption function is given by the following expression: C= 200+ 0.8Y.
a) What is the value of autonomous consumption?

b) Determine the consumption value if the income is €1000.

c) Determine the value of the savings if the yield is 2000€.

7
35. *The following table relates income levels to consumption expenditure:

Yield Consumption
100€ 150€
200€ 220€
300€ 290€
400€ 360€
500€ 430€

a) Determine the value of the marginal propensity to consume.

b) Determine the value of the marginal propensity to save.
c) Determine the average propensity to consume and analyze how it varies as
yield increases.

36. *Consider the following graph, representative of the private consumption function:

D Chart 2.2
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Y

a) What is the level of autonomous consumption?

b) Determine the marginal propensity to consume.

c) Determine the marginal propensity to save.

37. Determine the representative function of the consumption of an economy in relation to which it
you know that:

The consumption intentions of families are characterized by a linear dependence on

in relation to your income.
When the income is €8925, the consumption is €6650.
A 10€ increase in income corresponds to a 7€ increase in consumption.
Interpret the meaning of the parameters you found.

8
38. Consider the following information about a given economy where consumption presents
a linear dependence on family income:
When the savings are null, the income is €455.
An increase of €10 in income corresponds to an increase of €8 in consumption.
a) Determine the expression of the consumption function of this economy and interpret its meaning

of your parameters.
b) Determine the expression of the savings function, interpret the meaning of its
parameters and relate them to those of the calculated function in the previous item.
c) Determine the expression for the average propensity to consume and prove it mathematically,
that the value of this is always greater than that of the corresponding marginal propensity.

39. *Consider the information presented in the following table:

Yield Consumption Savings

0€ 5000€
10,000€ -2500€
15000€
24000€

a) Based on the data from the table, determine the value of the marginal propensity to consume.
What is the value of the marginal propensity to save?
b) What is the value of autonomous consumption?

c) Determine the consumption value when the income is equal to €24,000. What is the value of the

savings for this level of income?

40. *In a country where there is no state or relations with the outside, the consumption function is given

porC= 500+ 0.8Y.

a) Determine the marginal propensity to save.
b) If the planned investment is equal to 100, what will the equilibrium yield be?

41. *Consider that, in a two-sector model, the consumption function of an economy is given
by the expressionC= 150+ 0.8 Since autonomous investment is equal to 80.

a) Determine the equilibrium yield.

b) In equilibrium, what is the value of savings?
c) Determine the value of aggregate demand in this model.
d) If the investment rises to 150, what is the effect on the equilibrium yield? Explain.
this effect.

9
42. *Consider the following information regarding an economy:
C= 100+ 0.6Y
I= 300
a) Determine os valores de equilíbrio do rendimento, consumo e poupança.
b) Determine the value of aggregate demand in a two-sector model.
c) If the investment increases by 60 units, what will be the increase in income?
balance? Why? Create the graphical representation of the initial and final situation of
balance.
d) Consider that the marginal propensity to consume increases to 0.75. Determine the
new equilibrium income. Make a graphical representation of the initial and final situation
of equilibrium and explain the variation that occurred.

43. *Consider the following consumption function for a given economy where there are no
taxes or government expenses:C= 100+ 0.8Y.
a) If the national income is 100000, what is the value of consumption? What is the value of
savings for the same level of income?
b) Determine the yield for which the savings is null.
c) If the investment is equal to 100,000, what is the equilibrium level of income?

44. Consider the following information regarding an economy:

C= 50+ 0.75Y
I= 250
a) Calculate the equilibrium values of income, consumption, and savings.
b) Families, for each additional unit of income, decide to save 5% less of it.
what they did before. What are the new values for income, consumption
What is equilibrium savings? Interpret the results obtained.
c) If the investment increases to 260 (and with the marginal propensity to consume
initial), what are the new equilibrium values for income and consumption?
d) If, in relation to the previous item, the production were equal to 1500, what would be the
values of the planned investment and the actual investment?

45. Consider a closed economy without a State described by the following model:
C= 15+ 0,8YeI= I
a) Knowing that the investment is equal to 5, calculate the aggregate expenditure, the income, the
consumption and equilibrium savings. Explain how the variables relate to each other.
macroeconomic calculations.
indicate the value of the marginal propensity to consume
the expression of the average propensity to consume.

10
c) The marginal propensity to save becomes 0.3. What is the effect of this change on
the yield and about savings (consider the level of investment mentioned in a)?)
d) Revisit the initially presented model. Explain, without resorting to calculations, the
consequences of increasing investment from 5 to 10.
Quantify the consequences on the product and consumption of this variation.
e) What is the investment multiplier? What is the hypothesis accepted when it comes to
description of the multiplier mechanism?
f) Considering the level of investment mentioned in a), quantify the consequences
about the product, consumption, investment, and savings resulting from a
increase in autonomous consumption to 20.

11
THE PRODUCT MARKET
1.2. Introduction of the State

46. When the State is added to the simple Keynesian model, the equilibrium in the market of
good happens when
a)C+ I+ G+ T= Y
b)S+ T− G= I
S+ C= I+ G
d)S= I− (G+ T )

[Link] a closed economy with exogenous investment, if the State increases its...
expenses and reduce the transfers by the same amount, how the product varies
balance?
Increases.
b) Decreases.
c) Does not vary.

d) The provided elements are not sufficient to answer the question.

48. If the balanced budget multiplier is equal to 1, it means that:

a) increasing autonomous taxes by an amount equal to the sum of the increases of
expenses and transfers, the equilibrium income is increased by this
quantity
b) increasing the autonomous taxes by an amount equal to the sum of the increases of
expenses and transfers, the income has decreased by that amount
c) increasing autonomous taxes in such a way that the increase in total
The tax revenue is equal to the sum of the increases in spending and transfers.
the equilibrium yield has been increasing by an amount equal to the increase in the
expenses
d) increasing the autonomous taxes in such a way that the increase in the total
Revenue from taxes is equal to the sum of the increases in spending and transfers.
the equilibrium yield has decreased by an amount equal to the increase in the
expenses.
e) none of the previous sentences is true

12
[Link] that the increase in total taxes resulting from an increase in the marginal rate of
tax was offset by an increase in spending of the same amount. If in
initial situation there was a balanced budget, in the new situation:
a) a deficit comes to exist
a surplus comes to exist
c) the equilibrium yield increases
d) there are not enough elements to ascertain the truth of the previous statements
e) none of the previous statements is true

50. An increase in autonomous taxes:

a) increases the autonomous expenditure by the same amount

b) increases consumption by this amount times the marginal propensity to consume

c) decreases savings by that amount times the marginal propensity to save
d) improves the budget balance by that amount
e) none of the above statements is true

51. Increasing spending by the same amount as autonomous taxes:

a) the budget balance does not vary
b) the budget balance increases
c) the budget balance decreases
d) the provided elements are not sufficient to answer the question

52. Increasing transfers by the same amount as autonomous taxes:

a) the equilibrium yield and the budget balance increase
b) the equilibrium yield increases and the budget balance remains constant
c) the equilibrium yield and the budget balance remain constant
d) the equilibrium yield decreases and the budget balance remains constant
e) None of the above

53. To increase private consumption, it is preferable:

a) increase State spending instead of increasing transfers in the same
amount
b) reduce autonomous taxes instead of increasing transfers in the same
amount
c) both previous statements are true
d) none of the previous statements is true

13
54. The equilibrium yield increases if:
a) the marginal propensity to consume increases
b) autonomous taxes decrease
c) autonomous investment increases
d) all of the above
e) none of the above

The Keynesian model of income determination developed in this

point. What makes it Keynesian, as opposed to classical?

56. Explain why governments can use fiscal policy to stabilize the
economy. Why would an increase in output through policy be effective?
budgetary in a Keynesian economy, but not in a classical economy?

57. Why do we refer to the mechanisms as proportional taxes on the

income and social security as automatic stabilizers? Explain
carefully how and why they affect each of these mechanisms the fluctuations of
product.

58. Admit that a certain economy is characterized by the following relationships:

C= 500+ 0.75Yd

G= 300
I= 200
t= 20%
Trf= 100
a) Determine the analytical expression of the demand function.

b) Determine, analytically and graphically, the equilibrium yield.

c) The State increases its spending by 100. What is the effect of this decision on the level of
economic activity?
d) If, alternatively, the decision had been to increase the transfers in
the same amount, the impact on income would be greater, lesser, or equal to that of
previous line?

14
In a given economy, the following relationships are observed:
C= 20+ 0.8Yd

I= 20
G= 40
T= 30
a) Deduce the reduced form of the model. What is the expression for the expenditure multiplier?

autonomous aggregator? Graphically represent the obtained results.

b) Calculate the value of the public spending multiplier.
c) Calculate the value of the tax multiplier. Compare and comment on the result obtained.
with that of paragraph b).

d) Investigate the effect on the equilibrium yield resulting from a simultaneous increase
on public spending,∆G= 8e in taxes∆T= 10.

60. Consider an economy whose behavioral equations are as follows:

C= 50+ 0.75Yd

I= 250
G= 200
T= 0.2Y
Trf= 80
a) Determine the equilibrium values of income and budget balance.
b) If full employment output is Y= 1500, and
p if you intend to achieve it through

From a variation of expenses, what should this variation be?

c) Calculate the impact that the measure adopted in the previous item will have on the balance

budgetary, using the relevant multiplier.

d) Now suppose that it was intended to achieve full employment income while maintaining the
balanced budget. Only variations in spending and transfers are allowed.
What should these variations be equal to?

61. Assume an economy where full employment income is 2000. The equations of
the behavior of the economy is as follows:
C= 100+ 0.8Y d

I= 210
T= 0.25Y
G= 170+ d Y−
p Y( ) comd= 0.24
Trf= 300− zYcomz= 0.2
a) Find the reduced form of the model in relation to Y.
b) Are there automatic stabilizers in this economy? Which ones? Justify.

15
 c) Calculate the equilibrium income and budget balance, as well as the
multipliers of expenditures and transfers in relation to income.
d) What is the full employment budget balance equal to?
e) Check the equilibrium condition in this economy: S+ T− Trf= I+ [Link] a
total savings in private and public.
It is possible to improve the budget balance by reducing autonomous spending.
amount of the increase in autonomous transfers? Justify.

62. Consider the following relationships observed in a given economy:

consumption is proportional to disposable income, representing 90% of it.
The investment is constant and amounts to 50 million euros.
Taxes represent 20% of income.
State expenditures are set in such a way as to balance the budget.
a) Based on the given information, deduce the macroeconomic model of this economy.
b) Calculate the value of the equilibrium yield and represent it graphically.
c) Calculate the value of the investment multiplier.
d) Maintaining the restriction of a balanced budget, how can the Government change the
equilibrium yield?

63. Consider a closed economy where

consumption is a linear function of disposable income
the following relationship was observed between the average propensity to consume and income

available:PMC= 35.Y= 100e PMC

d = 2 yes= 200 d

public expenses are exogenous and amount to 300.

Direct taxes are insensitive to variations in income and amount to 200.
the investment has an autonomous part equal to 200, with the marginal propensity to
invest equal to 0.25.
a) Present the analytical expressions that describe this economy.
b) Define the concept of savings. What is its analytical expression?
c) Determine the equilibrium yield.
d) It was decided to adopt a level of expenses that balances the budget. What level
Is this it? What is the new equilibrium yield?
e) Calculate the tax multiplier. Interpret the result obtained.

64. In a given closed economy, the following relationships are observed:

Consumption is a linear function of disposable income where:
autonomous element= 50; marginal propensity to consume= 0.8
Taxes are represented by a linear function of global income where:
autonomous element= 20; income tax= 15%

16
35. *The following table relates income levels to consumption expenditure:

Yield Consumption
100€ 150€
200€ 220€
300€ 290€
400€ 360€
500€ 430€

a) Determine the value of the marginal propensity to consume.

b) Determine the value of the marginal propensity to save.
c) Determine the average propensity to consume and analyze how it varies as
yield increases.

36. *Consider the following graph, representative of the private consumption function:

D Chart 2.2
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Y

a) What is the level of autonomous consumption?

b) Determine the marginal propensity to consume.

c) Determine the marginal propensity to save.

37. Determine the representative function of the consumption of an economy in relation to which it
you know that:

The consumption intentions of families are characterized by a linear dependence on

in relation to your income.
When the income is €8925, the consumption is €6650.
A 10€ increase in income corresponds to a 7€ increase in consumption.
Interpret the meaning of the parameters you found.

8
2. CURRENCY

67. *Of the functions of money, the most important is to be:

a) a store of value
b) a unit of account
a medium of exchange
d) all of the above
e) none of the above

68. *Which of the following components are not part of M1?

a) Money in circulation.
b) Demand deposits.
c) Travel cheques.
d) Coins.
Everyone is part of M1.

69. *The technical definition of M2 includes:

M1
b) short-term deposits
c) money in circulation
d) all of the above
e) none of the above

70. Fiduciary currency:

a) is the same as commodity money
b) is equivalent to gold
c) it is currency because the law determines it
d) is not socially accepted
e) all of the above

71. *Demand deposits:

a) are considered part of the money supply
b) are not considered part of the money supply
c) are not part of the definition of M2
d) are the same as savings deposits
e) none of the above

18
72. Credit cards are different from debit cards because:
a) credit cards are considered as money and debit cards are not
b) debit cards are considered as money and credit cards are not.
c) debit cards serve as a means of exchange and credit cards do not
it is possible to make a purchase with a credit card without having a balance in the checking account,

which does not happen with the debit one

e) none of the above

73. Which of the following entities do not represent financial intermediaries?

a) Banks.
b) Money market mutual funds.
c) Life insurance companies.
d) Pension funds.
e) All represent financial intermediaries.

74. *The central banks:

a) they are located in the central part of a country
b) act as lenders of last resort for private banks and
they control the money supply
c) have little influence on the money supply
d) a) and b)
e) none of the above

75. The discount rate is:

a) the interest rate charged by the central bank for lending to other banks
b) the interest rate paid by the central bank on deposits made
c) the difference between the central bank's interest rate and the market interest rate
d) the difference between the interest rate charged on loans to consumers and the rate of
interest charged by the central bank on loans to other banks
e) none of the above

76. *When a bank makes a loan, the amount of money in the economy:
a) increases only while the funds remain in demand deposits
increases
c) decreases
d) it will remain the same, regardless of whether the funds remain in deposits or not
to the order

e) none of the above

19
77. *Commercial banks create money:
a) printing notes
b) taking out loans
c) requesting loans from the central bank
d) exchanging your reserves at the central bank for money
e) all of the above

78. The money supply multiplier is equal to:

1
a)
PMC
1
b)
PMP
1
c)
ratio of legal reserves

1
legal reserves− excess of reserves

79. All else being equal, a decrease in the reserve requirement leads to:
an increase in the money multiplier
b) a decrease in the monetary multiplier
a decrease in the nominal money supply
an increase in the real demand for money

80. If the legal reserve ratio is 20%, the money supply multiplier is:
a) 2
b) 5
c) 10
d) 20
e) none of the above

81. *Consider that some remittances from emigrants led to an increase in deposits in
banking system valued at 10000. A potential for creating currency valued at 12500
assumes a reserve rate of:
10%
b) 100%
c) 0%
d) 80%
12.5%

20
82. *The value of money:
a) may increase or decrease as the price level rises
b) decreases in inverse proportion to the increase in the price level
c) increases in proportion to the rise in the price level
d) decreases, but not proportionately, when the price level increases
e) none of the above

The demand for money is _______ related to income and _______ related
with the interest rate.
a) inversely, positively
b) positivamente, inversamente
c) inversely, inversely
positively, positively

84. An increase in income shifts _______ to the right, which leads to the rate of
balance oath _______.
a) the money supply curve decreases
b) the money demand curve, decreases
c) the money demand curve, increase
d) the money supply curve, increase

85. The demand for currency for speculative reasons increases when
a) the titles decrease in value
b) the central bank buys securities
c) the surpluses of legal reserves decrease
d) the money supply increases

86. Defina M1 e M2. O que está incluído em M1? O que se inclui em M2 e não em M1?
Establish the relationship between the components of M2 and the factors that underlie it.
search for currency.

87. Based on the demand function.= 50+ 0.5Y− 5i, explain the reasons that explain
searching for change.

88. Consider each of the following items regarding its potential use as a means of
exchange, store of value and/or unit of account:
a 10€ note;
a Multibanco card;

21
 a painting by Miró;
a treasury bond redeemable in 3 months;
an action of a company;

89. What would be the effect on the demand for money (M1) of each of the following
events?
an increase in real GDP.
b) An increase in the price level
c) An increase in the interest rate of savings deposits and Treasury bonds.
d) Doubling of all prices, wages and incomes. (You can calculate the exact effect
about the search for currency?)

90. Evaluate the effects of the following changes in the demand for M1 and M2. With which functions
do the coins relate?
a) Multibanco machines will allow withdrawals from accounts at any time
of savings accounts opened in banks.

b) The employment of more people in cashier roles at your bank.

c) An increase in inflation expectations.
d) The widespread acceptance of credit cards.
e) The fear of an imminent overthrow of the government.

f) An increase in the interest rate on demand deposits.

g) A reduction in the interest rate of term deposits.

91. Explain the concept of the opportunity cost of holding money. Give examples of
events that alter it.

If all depositors withdrew their money from the bank at the same time, not
there would be enough reserves to meet this demand. Why is it not being verified?
General runs on banks? If the required reserves were 100%, the banks would be
insurance? What effect would this level of mandatory reserves have on the ability to create
currency of the banking system?

93. Suppose that the reserve requirement was abolished. What would determine the level of reserves?
In the banking system? What would happen to the money supply multiplier in this
situation?

22
94. *Consider the information contained in the following table:

Component Value
1.000 million €
Currency in circulation 300
Coins 70
Demand deposits 1000
Savings deposits 650
Travel checks 10
Time deposits of 1 year 1800
Actions in money market fund 1000

a) Determine the value of M1.

b) Determine the value of M2.
c) Determine the value of M3.

95. * The legal requirement for reserves in Portuguese banks totals €10,000 when the total of
The deposits are €50,000. Determine the legal reserve ratio for this case.

96. *Consider that a certain bank has a reserve ratio of 10%. If a

consumer deposits €100,000, how much of that amount can the bank lend to others
clients?

97. *Consider a bank that has €100,000 in deposits and keeps €25,000 in reserves. If the
Legal reserve ratio for 10%, what will be the value of the excess reserves?

98. *Consider that the legal reserve ratio of banks is 20%. If a bank has €100,000 in
excess of reserves and decide to lend this amount, how much can the system
create bank?

99. *Consider the following information regarding a certain bank that has a ratio
of a 20% reserve:
Active Passive
100,000 100,000
reservations

a) Determine the minimum level of reserves that this bank must have.
b) If the bank maintains the initial level of reserves, what is the amount of excess reserves?
existing?

23
100. The following graph represents the total demand for money at different interest rate levels.
by law:

i Graph 2.3
12
11
10
9
8
7
6
5
4
3
2
1
0

0 100 200 300 400 500 600 M

a) If the money supply is 300, what will be the equilibrium interest rate?
b) If the money supply is 300 and the Central Bank expands it by 100, what will the rate be?
of equilibrium interest?
c) And if the Central Bank contracts the same money supply by 100, what will the interest rate be?

of balance?
d) If, in the case of item b), the interest rate is set at 4% and does not follow the
increase in the amount of money demanded, then:
People will buy fewer securities.
People will buy fewer bonds and decrease their cash holdings.
iii. People will buy more bonds in order to reduce their cash holdings.
iv. People will not change their possession of money and securities

101. *Consider the following graph:

I Graph 2.4
12
11
10
9
8
7
6
5
4
3
2
1
0

0 100 200 300 400 500 600 M

a) Indicate the value of the equilibrium interest rate.

b) If demand increases by 50 for each level of interest rate, what will be the new rate of
balance oath?

24
 c) Now consider that demand decreases by 100 for each level of interest rate. What is the
new equilibrium interest rate?

102. In a certain economy, the demand for money is represented by the expression
M= 0.5Y− 4000i, withY= 1000.
a) Calculate the value of the money supply by the central bank if it decides to fix
the interest rate at 5%. Represent graphically.
b) Now consider that the central bank decides to raise the interest rate by 3 points
percentages. What should be the new value of the money supply? It is a
expansion or a monetary contraction? Represent these changes on the graph
designed earlier.
c) Suppose that the central bank intends to keep the nominal interest rate fixed at 8%.
Suppose, also, that the real product increases by 3% and that the inflation rate is 2%. In

how much should the money supply vary?

25
3. IS-LM MODEL

A higher interest rate would decrease investment, which would lead to a lower
search for goods and services and, thus, a decrease in the equilibrium product. This relationship
is graphically represented by:
a) IS curve
b) planned demand curve
c) money demand curve
d) LM curve

104. Which of the following factors will shift the IS?

a) An increase in government spending.
b) A decrease in expected inflation.
c) A variation in the multiplier.
A variation in the confidence of consumers and entrepreneurs.
e) A reduction of autonomous taxes.
f) All the previous statements are true.
g) None of the previous statements is true.

105. An increase in the marginal tax rate:

a) increases the slope of the IS, causing it to rotate to the left
b) the IS moves to the left, maintaining the same slope
c) the IS shifts to the right and becomes steeper
d) none of the previous statements is true

106. The product is _______ related to the investment and this, in turn, is
_______ related to the interest rate.
positively, positively
b) negatively, negatively
c) negativamente, positivamente
d) positivamente, negativamente

107. For a constant money supply, an increase in output shifts the curve of the
search for currency to the right, raising the equilibrium interest rate. This
relation is graphically represented by:
IS curve
b) planned aggregate demand curve

26
 c) LM curve
d) money demand curve

108. Which of the following factors will shift the LM?

a) A decrease in the real money supply.
b) A variation in the marginal tax rate.
c) An increase in consumer and business confidence.
d) All the previous statements are true.
e) None of the above statements is true.

109. Which of the following factors shift the LM curve?

a) A variation in the real money supply
b) A variation of autonomous expenditure
c) An increase in business confidence
d) All the previous factors

110. Which of the following factors would shift the LM curve downwards?
a) Decrease in the money supply.
b) Reduction of government spending.
c) Decrease in taxes.
d) Shift of the money demand curve to the left.

111. Which of the following factors would shift the LM curve upward?
a) A decrease in the money supply.
b) Sale of securities by the Central Bank.
c) A rise in the general price level.
d) All of the above.

112. The IS-LM model represents

a) the side of aggregate demand in an economy
b) the aggregate supply side of an economy
c) the aggregate demand and supply of an economy
d) none of the above

113. The goods market and the money market interact through
a) influence of the money supply on income
b) influence of income on money demand
c) influence of the interest rate on investment

27
 d) all of the above

114. Which of the following effects refers to a connection between the monetary and ...
goods?
a) a change in interest rate leads to a change in public expenditure
b) a change in the interest rate leads to a change in investment
c) a change in the interest rate leads to a change in the demand for currency
a change in the product leads to a change in the money supply

115. In the following graph, indicate which (or which) of the marked points represent points
of equilibrium in the monetary market:

Graph 2.5

LM

d e

c
b
IS

Product (Y)

only point (a).

b) the points (a), (e) and (b).
c) points (a) and (b).
(d) the points (d), (a), and (c).

116. In the previous graph, point (c) may constitute an IS-LM equilibrium point:
a) if the central bank sells bonds
b) if the central bank buys bonds
c) if the government raises taxes
d) in none of the previous cases

117. If an economy is at a point on the LM curve, but to the right of the IS curve:
a) there is no equilibrium either in the product market or in the monetary market
b) there is an excess supply in the product market and in the money market
c) there is excess demand in the product market and equilibrium in the market
monetary
there is excess supply in the product market and equilibrium in the monetary market

28
 e) none of the previous statements is true

118. If an economy is at a point on the IS curve, but to the left of the LM curve:
a) there is excess demand in the product and monetary markets
b) there is equilibrium in the product market and excess supply in the monetary market
c) there is excess demand in the product market and equilibrium in the market
monetary
d) there is an excess supply in the product market and equilibrium in the monetary market
e) none of the previous statements is true

119. Which of the following statements is true? (there may be more than one):
a) The LM curve is horizontal when the demand for money does not depend on the interest rate.

b) The lower the elasticity of the demand for money concerning the interest rate,
the more inclined the LM curve is.
c) The IS curve is vertical when investment does not depend on the interest rate.
d) If investment depends positively on the level of income, the IS curve becomes
more horizontal.
e) All the previous statements are true.
f) None of the previous statements is true.

120. A variation of the multiplier will:

a) to parallelly shift the IS curve
b) vary the slope of the IS curve
c) shift the LM curve
d) none of the above statements is true

121. A variation in the interest rate will generally affect:

a) the search for currency

b) the level of investment

c) the price of the obligations

d) all of the above

e) none of the above
122. A drop in the interest rate:
a) shifts the IS to the right
b) shifts the LM to the right
c) shifts both IS and LM to the right
d) Shifts both IS and LM to the left
e) None of the above statements is true

29
123. An increase in the interest rate causes investment to ______, demand ______ and
the equilibrium product _______.
a) decrease, decrease, increase
reduce, reduce, reduce
decrease, increase, decrease
d) decrease, increase, increase
e) none of the above

124. A variation in the price level

a) it changes the slope of the aggregate demand curve
b) changes the slope of the aggregate supply curve
c) causes the LM to shift

d) causes a proportional variation in the nominal money supply

e) none of the previous statements is true

125. A rise in the general price level _______ the product and _______ the interest rate.
would increase, would increase
would decrease, would decrease

would increase
d) would decrease, would increase

126. In the IS-LM model, with a horizontal aggregate supply curve, expectations of the rate
of inflation increase:
a) the equilibrium income increases because the LM shifts to the right
b) the level of income increases because the IS curve shifts to the right, since
Now, for the same level of nominal interest rate, the investment is greater.
c) the equilibrium output decreases because the IS shifts to the left, once
that, now, for the same level of the nominal interest rate, the investment is lower
d) the equilibrium output is higher because both the IS and the LM move to the
right
e) none of the above statements is true

127. An increase in government spending

a) increases the demand for goods and services, which leads to a shift to the left
from the IS curve, raising the output and the equilibrium interest rate
b) increases the demand for goods and services, which leads to a shift to the right
from the IS curve, raising the output and the equilibrium interest rate

30
 c) decreases the demand for goods and services, which leads to a rightward shift of the
IS curve, raising the product and the equilibrium interest rate
d) decreases the demand for goods and services, which leads to a shift to the left
from the IS curve, raising the product and the equilibrium interest rate
e) none of the previous statements are true

128. An expansionary fiscal policy

a) shifts the LM curve downwards, increases output and lowers the interest rate
b) shifts the LM curve upward, reduces the output, and raises the interest rate
c) shifts the IS curve to the left, decreases the output and lowers the interest rate
d) shifts the IS curve to the right, increases output and raises the interest rate
e) none of the above statements is true

129. Which of the following effects would most likely occur after an increase in expenses?
from the government?

a) Disposable income would increase, consumption would increase, the product and the

yields would increase, the demand for currency would shift to the left, the
interest rate would increase.
b) Disposable income would increase, consumption would increase, the output and the
yields would increase, the demand for currency would shift to the right, the rate
It would increase in interest.

c) The disposable income would decrease, consumption would decrease, the product and the

yield would decrease, the demand for money would shift to the left, the rate
I would reduce interest.

d) Disposable income would increase, consumption would increase, the product and the

yield would increase, the demand for currency would shift to the right, the rate
of interest would decrease.

e) none of the above statements is true

130. A tax increase

a) it decreases the demand for goods and services, which leads to a shift to the right of the
IS curve, causing the product and the equilibrium interest rate to rise
b) it increases the demand for goods and services, which leads to a shift to the right
from the IS curve, raising the product and the equilibrium interest rate
c) decreases the demand for goods and services, which leads to a shift to the left
from the IS curve, lowering the product and the equilibrium interest rate
d) decreases the demand for goods and services, which leads to a shift to the left
from the IS curve, increasing the output and the equilibrium interest rate
e) none of the previous statements is true

31
131. Which of the following sequences best describes a restrictive fiscal policy?
a) Public spending decreases, the product increases, the demand for money increases, the interest rate

interest rises, the investment rises.

b) Taxes decrease, the product grows, the demand for currency rises, the rate of
Interest rates rise, investment decreases.

c) Public expenditure decreases, output falls, the demand for money decreases, the rate of
I swear the fall, the investment increases.

d) The money supply decreases, interest rates rise, investment falls, the product
descend.
e) none of the previous statements is true

132. An increase in the money supply

a) shifts the LM curve upwards and increases output and the interest rate
b) shifts the LM curve downwards, increases output and decreases the interest rate
c) shifts the LM curve upward, decreases the output, and raises the interest rate
d) shifts the LM curve downwards and increases the output and the interest rate
e) none of the above statements is true

An expansionary monetary policy would also affect the goods market because
It would lower the interest rate, which would lead to greater investment.
b) it would cause an expansionary fiscal policy
c) it would raise the interest rate, which would lead to lower investment
would raise the interest rate as well as, consequently, the investment
e) none of the above statements is true

134. A combination of expansionary fiscal and monetary policies leads to a

a) increase in the product and the interest rate

b) rise in product and fall in interest rate

c) fall in the interest rate but indeterminate effect on the product
d) rise in the product but indeterminate effect on the interest rate
e) none of the previous statements is true

135. If the demand for money depends only on the level of income and not on the interest rate, a
increase in autonomous investment:
a) causes an increase in the equilibrium yield
b) decreases the interest rate and does not change the equilibrium yield
c) decreases both the yield and the equilibrium interest rate
d) decreases the level of income and increases the interest rate

32
 e) none of the previous statements is true

136. The crowding-out effect has to do with the following facts:

a) An expansionary fiscal policy causes an increase in the interest rate which, by its
at times, reduce the investment

b) an expansionary fiscal policy increases the interest rate due to the shift
to the left of the LM curve
c) a contractionary monetary policy leads to an increase in the interest rate, therefore
a break in investment
d) all the previous answers are true
e) none of the previous answers is true

137. The crowding-out effect

a) is associated with a lower autonomous expenditure multiplier
b) it is associated with a larger autonomous expenditure multiplier
c) it is independent of the autonomous expenditure multiplier
d) it is the multiplier of autonomous expenditure itself

e) none of the above

138. The crowding-out effect is maximum when

a) the interest rate does not influence investment
b) the investment is highly sensitive to the interest rate
c) the demand for money is highly sensitive to the interest rate
d) all of the above
e) none of the above

139. If the LM is vertical:

a) the velocity of circulation of money is constant.
b) the partial crowding-out
c) individuals are willing to absorb any issuance at the same interest rate
monetary policy implemented by the central bank

d) monetary policy is not very efficient

e) none of the previous statements is true

140. If the LM curve is quite steep and the IS curve is very flat, then the
the most effective policy measures are those in which:
a) if the money supply varies
if government spending varies

33
 c) if the autonomous taxes vary
d) if the transfers to individuals vary
e) none of the previous statements is true

141. If the IS curve is quite steep and the LM curve is very flat, then the
the most effective policy measures are those in which:
a) if the money supply changes
b) if government spending varies
c) if autonomous taxes vary
d) if the transfers to individuals vary
e) none of the previous statements is true

142. Monetary policy cannot affect output when

a) the investment does not depend on the interest rate

b) the investment is highly elastic in relation to the interest rate

c) the demand for money does not depend on the interest rate

d) the aggregate supply curve is horizontal

e) none of the above statements is true

143. If there is a neoclassical aggregate supply, a decrease in government spending

a) lowers the interest rate and the price level and increases private investment
in the same amount as the reduction in spending
b) causes a decrease in nominal yield and an increase in consumption

c) keeps real income constant, increases investment and has no

any effect on the price level
d) none of the previous statements is true

The aggregate demand curve is steeper the more

a) lower for the elasticity of money demand in relation to the interest rate
higher for the elasticity of investment in relation to the interest rate
c) the greater the multiplier
d) all the previous statements are true
e) none of the above statements is true

145. Consider the IS-LM model in a closed economy.

a) Deduce the reduced form of this model in relation to the interest rate.
b) Find the expressions for the spending multipliers, of investment
autonomous, two autonomous taxes and the money supply in relation to the rate of

34
 I swear, stating whether they are positive or negative. Mention the economic mechanisms.
that lead to the results achieved.
c) Under what conditions are these maximum and minimum multipliers? Justify.

146. Explain:
a) How and why the multiplierα Gand the sensitivity of aggregate demand to interest rates
We affect the slope of the IS curve.
b) Why is the slope of the IS curve a factor to consider in
determination of the effects of monetary policy.
c) How and why the sensitivities to income and interest of money demand
we affect the slope of the LM curve.
d) Under what circumstances can the LM curve be horizontal.
e) Why does a horizontal LM curve imply that fiscal policy has the
the same effects on the economy as those that occur in the context of the model
Keynesian with State.

147. Classify the following statements as true, false, or uncertain.

Justify.
a) The effect on the yield of an increase in the real supply of money depends only
of the slope of the LM curve.
b) An increase in government spending raises the equilibrium income and the rate of
I swear.
c) The crowding-out effect of transactions refers to the reduction of private spending.
total that occurs when state spending increases.
d) An increase in the real money supply reduces the yield and the interest rate of
balance.

148. Suppose there exists an economy whose investment function is very sensitive to the
interest rate, that is, a small change in the interest rate causes a large
variation in the level of investment.
a) Graphically represent the IS curve that corresponds to the situation described above.
b) Using graphical analysis, determine the effectiveness of the budgetary policy
in this situation. What is the effectiveness of monetary policy?

149. *Consider the following information regarding a given economy:

C= 1000+ 0.75Y
I= 500− 20i
T= 200

35
 G= 200
a) Determine the analytical expression of the IS curve related to this economy.
b) Knowing that the interest rate is 8%, determine the equilibrium yield.
c) Suppose the tax increases from 200 to 300. How much does the IS curve shift?

150. The market for goods and services in an economy is represented by the following
expressões:

C= 300+ 0.8Yd
I= 100− 10i
T= 50+ 0.25Y
G= 200
Trf= 50
a) Determine the expression for household savings.
b) Determine the analytical expression of the IS curve. Represent it graphically.
c) Determine the equilibrium yield when the interest rate is 4%.
d) If the transfers increase by 15, what is the displacement and the new expression of the

IS curve? What is the new equilibrium yield for it?= 4%?

151. *Consider the following information regarding a given economy:

C= 130+ 0.8Yd
I= 300− 18i
T= 0.2Y
G= 250
Trf= 50
a) Determine the expression for household savings.
b) Determine the analytical expression of the IS curve. Represent it graphically.
c) If public spending increases by 20, what will the new IS function be?
d) What will be the equilibrium yield if the interest rate is 8%?
e) What is the interest rate corresponding to an equilibrium yield of 1000?

152. *Consider the following equations related to the goods and services market of a
economic data:

C= 100+ 0.75Yd
I= 200− 10i
T= 40+ 0.2Y
G= 170
Trf= 80

36
 a) Deduce the analytical expression of the IS curve and represent it graphically.

b) If the investment function were I= 200− 20i, what would be the expression of the IS curve?
Represent it in the previous graph.
c) What changes occur in the IS curve if public spending increases by 20?
d) What changes occur in the IS curve if autonomous taxes increase by 10?

153. The supply and demand for money in an economy are given by:
M S= 300P

L d = 0.4Y− 50i
a) Determine the equation of the LM curve.

b) Determine the slope of the LM curve.

c) Determine the intersection value of the LM curve with the x-axis.
d) Determine the yield for an interest rate of 5% andP= 1 .

154. *Consider that the supply and demand for money in an economy are as follows:
M S= 540P

L d= 0.3Y− 60i
a) Determine the equation of the LM curve.

b) Determine the value of the income when P= 1e i= 4%.

c) Considering that P= 1, determine the interest rate that corresponds to a
income of 2500.

155. An economy is described by the following equations:

C= 0.8 (1 − )Y
t= 0.25
I= 900− 50i

G= 800
L= 0.25Y− 62.5i

M
= 500
P
An IS curve represents the relationship between interest rates and the level of income that equilibrates the goods market. It shows the combinations of interest rates and output levels where investment equals savings.

The LM curve represents the relationship between the liquidity preference and the money supply in an economy, showing the combinations of interest rates and income where the money market is in equilibrium.

c) Determine the equilibrium levels of income and interest rate.

d) Calculate the value of the expenditure multiplier corresponding to the Keynesian model
with the state. Calculate the value of the spending multiplier in this model with the market.

monetary. Explain the difference between the two.

e) Determine the effect of a change in spending on the equilibrium interest rate.

37
156. An economy is described by the following equations:

C= 100+ 0.8Yd
T= 15+ 0.25Y
Trf= 60
G= 125
L= 0.2Y− 40i
P= 1
I= 150− 20i
M= 50
a) Determine the expressions for the IS and LM curves and explain their significance.
b) Calculate the equilibrium values of income, interest rate, consumption,
investment and budget balance.
c) Determine the values for spending multipliers, real monetary balances and
transfers.
d) Suppose that you want to increase the equilibrium yield by 10, keeping the rate
of constant interest, through the manipulation of spending and the money supply.
Quantify these economic policy measures.
e) If prices increase, what will happen to the interest rate and income
equilibrium? Illustrate graphically. Calculate the effect on the level of income of a
25% increase in the price index.
f) Suppose the State decides to increase expenditures and autonomous taxes by 20.
What will be the effect of these measures on equilibrium income and the balance?
budgetary?
g) What is the multiplier of the balanced budget in this economy?

157. Consider an economy characterized by the following equations:

C= 124+ 0.6Yd
G= 200
I= 350− 5i
T= 0.2Y
L= 140+ 0.3Y− 5i
M= 450
P= 1
a) Determine the analytical expressions of the IS and LM curves.
b) Calculate the equilibrium values of income, interest rate, consumption,
investment and budget balance.
c) Suppose that an increase of 20 in public consumption is observed. What is the effect on
the equilibrium yield?

38
 d) Suppose that the State increases both spending and autonomous taxes by 20.
What effects would this measure have in terms of equilibrium yield and balance?
budgetary?

158. Consider the following equations related to the product and monetary markets of
certain economy

C= 300+ 0.8Yd
T= 50+ 0.25Y
Trf= 50
G= 200
I= 100− 10i
M= 400
L= 0.4Y− 10i
P= 1
a) What is the analytical expression of the IS curve?

b) What is the analytical expression of the LM curve?

c) What are the levels of equilibrium of income and the interest rate?
d) Suppose that, simultaneously, there was an increase of 200 in the transfers.
and public spending. What is the new balance? What is the variation in tax revenues?

159. An economy is described by the following equations:

C= 250+ 0.8Yd
T= 150+ 0.25Y
= 200
G= 700
I= 400− 5i
M= 700
L= 100+ 0.25Y− 5i
P= 1
a) Calculate the macroeconomic equilibrium of this economy.
b) The State decides to decrease the nominal stock of currency by 100. Determine the new

macroeconomic equilibrium.
c) Graphically represent the two equilibria.

160. Consider the following elements related to a certain economy:

C= 105+ 0.8Yd
T= 0.25Y

39
 G= 375
I= 450− 10i
M
= 300
P
L= 0.3Y− 20i
P= 1
a) Determine analytically and graphically the IS curve.
b) Calculate the LM function.

c) Establish the conditions for macroeconomic equilibrium.

d) How much does an increase in public spending of 50 affect the level of
equilibrium yield? What is its impact on the IS curve? What is the variation of
interest rate?
e) Now suppose that the real money supply varies by 50. What is the
impact of such a factor on the level of equilibrium income?
f) Assume that the government sets objective Y= 2500 euros that opts for
use of monetary policy. How much should the variation in nominal supply be
of currency?

161. Assume an economy characterized by the following conditions:

C= 100+ 0.75Yd
I= 200− 10i
T= 40+ 0.2Y
G= 170
Trf= 80
M= 500
L= 100+ 0.5Y− 10i
P= 1
a) Calculate the macroeconomic equilibrium of this economy.
b) Quantify the effects of a 10% reduction in the tax rate accompanied by
an increase in the nominal money supply by 50. represent it graphically
verified changes.

162. Consider the following model:

C= 10+ 0.8Yd
T= 0.2Y
Trf= 12.5− 0.05Y
G= 50

40
 I= 30− 84i
L= 10+ 0.25Y− 60i
M
= 50
P
P= 1
a) Calculate the equilibrium values of the endogenous variables of the model. What is the balance

budgetary?
b) The objective of budget balance can be achieved through: i) a policy
budgetary (G); or ii) a monetary policy (M). what are the necessary variations
of these instruments to achieve the intended goal?
c) Indicate whether the policies are expansionary or contractionary. Given the result.
found, we can conclude that a variation in the budget balance is a good
indicator of the policy followed? Justify.

Exercises taken from the exercise sheets of the previous academic year

41
42