UNIVERSITY OF GRONINGEN

FACULTY OF ECONOMICS AND BUSINESS

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Student Number:

MACROECONOMICS FOR EOR (EBB027B05)

Midterm Exam with Answers

Program 2017-2018

September 29, 2017

18.30-20.30 hours

This exam consists of 25 multiple-choice questions. To answer these questions use the
special sheet provided to you for this purpose. No credit will be given to answers in this
booklet. Make sure that you read the instructions on the left hand side of the answer sheet.

Both this booklet and the answer sheet have to be handed in after the exam. Do not forget
to write your name and student ID number on the documents.

The answers will be posted on Nestor as soon as the grades have been processed.

Any questions regarding this exam can be addressed to G.H. Kuper ([email protected])
1. In 2016, a country produces 12,000 TV sets at a price of 500 euros each, and 1,000 cars
costing 20,000 euros each. In 2017, TV production rises by 10% while prices of TV sets
remain constant. In 2017 car production does not increase while car prices increase by
5%. What is the value of real GDP in 2017 based on 2016 prices, if this country only
produces TV sets and cars?
A) 26 million euros.
B) 26.6 million euros.
C) 27 million euros.
D) 27.6 million euros.
Answer: B

2. The national income accounting identity

A) is based on the insight that all spending arrives somewhere as income.
B) is based on the insight that leakages of spending equals injections.
C) gives rise to the equation (S−I) + (T−G) − (EX−IM) = 0.
D) All of the above.
Answer: D

3. Given the circular-flow identity, if the government’s budget is in deficit then it must be
that
A) private savings exceed investment.
B) exports fall short of imports.
C) savings fall short of investment and exports exceed imports.
D) savings fall short of investment and exports fall short of imports.
Answer: D

4. A horizontal aggregate supply curve means that

A) prices rise if aggregate demand goes up.
B) prices rise if aggregate supply increases.
C) firms supply any amount of goods the market demands at the given price level.
D) None of the above.
Answer: C

5. When a country has a current account deficit, we know that

A) there is a deficit on the capital account + official reserves.
B) it is lending to the rest of the world.
C) it is borrowing from the rest of the world.
D) net demand for domestic currency is negative.
Answer: C

6. If more money (M) is injected into the economy

A) nominal income (PY) increases with certainty.
B) nominal income (PY) stays the same with certainty.
C) nominal income (PY) decreases with certainty.
D) What happens to nominal income (PY) depends on velocity (V).
Answer: D
7. If total income exceeds planned expenditure
A) inventories build up, which leads firms to reduce production.
B) inventories build up, which leads firms to increase production.
C) inventories fall, which leads firms to reduce production.
D) inventories fall, which leads firms to increase production.
Answer: A

8. Consider a closed economy that is characterized by the following equations:

Consumption: C = C0 + c(Y − T); where 0 < c < 1,

Investment: I = I0 + bY − di; where d > 0,
Government Spending: G = G0,
Taxes: T = tY; where 0 < t < 1.
Real Money Demand: L = L0+ kY − hi; where k, h > 0.
Real Money Supply: M = M0, with P=1.

Based on this information, what is the slope of the IS curve when drawn in the standard i-
Y diagram with the interest rate on the vertical axis?
A) –[1+c(1–t) – b ]/d.
B) –(1+c – t + b )/d.
C) – d /[1+c(1–t) + b ].
D) None of the above.
Answer: D

9. If imports depend positively on income, the spending multiplier in a model with imports
A) is larger than without imports.
B) is smaller than without imports.
C) is the same as the multiplier without imports.
D) measures the income change resulting from a one-unit increase in imports.
Answer: B

10. Suppose government spending rises temporarily. If consumption depends on permanent

income rather than current income, a temporary increase of government spending
A) raises the multiplier effect.
B) lowers the multiplier effect.
C) leaves the multiplier effect unaffected.
D) increases consumption a lot.
Q10 is discarded, because it can be read in different ways. The grade is adjusted
accordingly

11. The demand for money

A) rises with income.
B) falls with the interest rate.
C) Both A and B are correct.
D) None of the above.
Answer: C
12. Money supply
A) falls when income falls.
B) is controlled by the central bank.
C) is visualized by a vertical line in i-Y space.
D) All of the above.
Answer: B

13. If the central bank conducts monetary policy by fixing the interest rate, then
A) money supply goes up if government spending increases.
B) money supply goes up if government spending decreases.
C) money supply goes down if government spending increases.
D) money supply stays constant if government spending increases.
Answer: A

14. Fixing the interest rate in the IS-LM model

A) makes money supply endogenous.
B) neutralizes the effect on income of shocks to the LM-curve.
C) strengthens the effect on income of shocks to the IS-curve.
D) All of the above.
Answer: D

15. When an economy is in a liquidity trap

A) the IS-curve becomes horizontal.
B) the LM-curve becomes vertical.
C) changes in money supply have no effect on the interest rate.
D) changes in government spending have no effect on output.
Answer: C

16. The IS-curve

A) is upward-sloping in an i-Y diagram.
B) would be vertical if investment depends on income but not on the interest rate.
C) would be horizontal if investment depends on income but not on the interest rate.
D) moves to the left if world income rises.
Answer: B

17. A combined increase in taxes and government spending in the IS-LM model
A) does not shift the IS-curve.
B) will lead to a shift of the IS-curve to left.
C) will lead to a shift of the IS-curve to right.
D) has an ambiguous effect on the IS-curve.
Answer: C

18. Identify the item(s) that is (are) recorded in the Dutch capital account:
A) A Dutchman buys a Ferrari.
B) A Dutchwoman invests in US government securities.
C) A Dutch family buys a Samsung TV set made in the Philippines.
D) All of the above.
Answer: B
19. The simplified foreign exchange market equilibrium condition i = iWorld assumes that
A) domestic residents discriminate against foreign assets.
B) expected depreciation is zero.
C) expected depreciation equals expected inflation.
D) foreigners do not discriminate against domestic goods.
Answer: B

20. In which of the following cases is the economy experiencing a deficit on the balance of
payments?
A) If the FE-curve is vertical and the IS-LM intersection is to the left of it.
B) If the FE-curve is horizontal and the IS-LM intersection is above it.
C) If the FE-curve is upward-sloping and the IS-LM intersection is to the right of it.
D) None of the above.
Answer: C

21. Assume perfect capital mobility. An increase in government spending

A) increases income under flexible exchange rates.
B) increases income under fixed exchange rates.
C) decreases income under flexible exchange rates.
D) decreases income under fixed exchange rates.
Answer: B

22. Assume perfect capital mobility. An increase in money supply

A) increases income under flexible exchange rates.
B) increases income under fixed exchange rates.
C) decreases income under flexible exchange rates.
D) decreases income under fixed exchange rates.
Answer: A

23. The exchange rate is said to overshoot if

A) its immediate response to, say, a money supply increase, exceeds its long-run
response.
B) if it responds too quickly to a money supply change.
C) it initially moves in the wrong direction.
D) it jumps to the wrong long-run equilibrium.
Answer: A

24. Assume an IS-LM-FE model under capital controls. An increase in government spending
A) increases income under flexible exchange rates.
B) leaves income unchanged under fixed exchange rates.
C) Both A and B are correct.
D) None of the above.
Answer: C

25. When firms operate at full capacity and prices may change
A) fiscal and monetary policy work the same way as with fixed prices.
B) the nominal money supply never changes.
C) the real exchange rate never changes.
D) there is full crowding out of any increase in government spending.
Answer: D