Lahore School of Economics

Winter Term, 2010

BSc II – Sec B
Macroeconomics I

Practice MCQs for Mid-Term

1. Which of the following identities is FALSE?

a. Y = C + I + G + NX
b. YD = Y – TA + TR
c. BS = TA – TR – G
d. I – S = (G – TA + TR) + NX
e. S + TA – TR = I + G + NX

2. Assume that GDP = 8100, C = 5400, Gross private domestic

investment = 1200, G = 1600. Which of the following is true?
a. imports exceed exports by 100
b. exports exceed imports by 100
c. depreciation is 100
d. trade surplus is 100
e. both b. and d.

3. Assume the budget deficit decreased by Rs.15 billion. Private

savings decrease by Rs.20 billion, exports increased by Rs.10
billion and imports increased by Rs.15 billion. By how much did
investment change?
a. the investment decreased by Rs.10 billion
b. the investment increased by Rs.10 billion
c. the investment did not change at all
d. the investment decreased Rs.20 billion
e. the change in investment cannot be determined from the
information

4. Assume the budget deficit increases. Which of the following can

happen?
a. private domestic saving can increase
b. domestic investment can decrease
c. imports can increase
d. exports can decrease
e. all of the above

5. Assume there is an increase in budget surplus. Which of the

following is likely to happen?
a. imports will increase more than exports.
b. exports will increase more than imports
c. private savings will increase more than investment
d. investment will remain the same while private saving will increase
e. investment will decrease

6. Assume nominal GDP was Rs8 trillion in year 1 and Rs8.8 trillion in
year 2. If year 1 is the base year, then
a. the GDP deflator is 110
b. prices increase on average by 10%
c. real GDP has not changed
d. none of the above is true
e. both a. and b. are true, but only if c. is true

7. Assume a model with no government or foreign sector. If actual

investment is Rs10 billion while planned investment is Rs20 billion,
we know that
a. unintended investment = - Rs10 billion
b. unintended investment = + Rs10 billion
c. unintended investment = + Rs30 billion
d. the income level is above its equilibrium
e. there is an excess supply of goods and services

8. In a simple model with no government or foreign sector, a decline

in investment of Rs10 will lead to a Rs50 decline in the equilibrium
level of income if
a. the mps is 0.2
b. the mpc is 0.5
c. ration of total consumption to total income is 0.8
d. changes in consumption divided by changes in income = 0.2
e. changes in savings divided by changes in income = 0.8

9. Assume a model with no foreign sector, and income tax rate of 0,

and a consumption function defined as C = 400 + (0.75)YD. If
government transfer payments decrease by 200, income will
a. decrease by 600
b. decrease by 800
c. increase by 800
d. increase by 600
e. increase by 150

10. Assume an economy with no foreign sector, an mps = 0.1

and t = 1/3. Assume that government transfer payments decrease
by 200. Which of the following is true?
a. national income will decrease by 450
b. tax revenues will decrease by 150
c. the budget surplus will increase by 50
d. consumption will decrease by 450
e. all of the above
11. Assume S = - 100 + (0.2)YD and the ‘t’ = 0.25. What would
be the effect on equilibrium income of a decrease in autonomous
consumption of 50?
a. a decrease in income of 400
b. a decrease in income of 250
c. a decrease in income of 100
d. a decrease in income of 125
e. a decrease in income of 100

12. In a model with income taxes, assume that autonomous

investment decreases. Which of the following will be true?
a. the full employment budget surplus will decline
b. the actual budget surplus will decrease
c. the cyclical component of the budget surplus will decrease
d. the budget surplus will remain unaffected
e. both b. and c.

13. If the full-employment budget surplus is positive but the

actual budget surplus is negative, what can we conclude?
a. nothing
b. that saving exceeds investment
c. that the economy is in a boom
d. that fiscal policy is too restrictive
e. that fiscal is too expansionary

14. If investment becomes more responsive to changes in the

interest rate, then
a. the size of the expenditure multiplier will increase
b. income will increase more with any increase in the interest rate
c. the IS curve will become flatter
d. the IS curve will become steeper
e. both a. and c.

15. Which of the following will not cause a shift of the IS curve?
a. an increase in transfer payments
b. a decrease in taxes
c. a change in money demand
d. a change in business and consumer confidence
e. a change in autonomous spending

16. If there is an increase in income tax rate, then the IS curve

will
a. become flatter and shift to the right
b. become steeper and shift to the left
c. become steeper and shift to the right
d. shift parallel to the left
e. shift parallel to the right
17. The LM curve becomes steeper if
a. money demand becomes less sensitive to changes in the
interest rate
b. money demand becomes more sensitive to changes in the interest
rate
c. investment becomes more sensitive to changes in the interest rate
d. investment becomes less sensitive to changes in the interest rate
e. money demand becomes less sensitive to changes in income

18. In an IS-LM framework, a decrease in autonomous saving

a. decrease income, but increases the interest rate
b. decreases both income and money demand
c. decreases both income and the interest rates
d. increases both income and the interest rates
e. shifts the LM curve to the left

19. Monetary policy becomes more effective as

a. the interest sensitivity of investment increases
b. money demand becomes less sensitive to changes in the interest
rate
c. mps decreases
d. the tax rate decreases
e. all of the above

20. The monetary policy multiplier is large if

a. the LM curve is steep and IS curve is flat
b. the LM curve is flat and IS curve is steep
c. money demand is very sensitive to interest rate
d. investment is very interest insensitive
e. both money supply and money demand are very interest sensitive

21. An increase in the fiscal policy multiplier can be caused by

a. an increase in the interest sensitivity of investment
b. an increase in the interest sensitivity of money demand
c. a decrease in the interest sensitivity of money demand
d. an increase in the income tax rate
e. a decrease in autonomous saving

22. The slope of the AD curve will become flatter if

a. money demand becomes more income inelastic
b. money demand becomes more interest elastic
c. investment becomes more interest elastic
d. both a. and c.
e. both b. and c.

23. Monetary policy becomes more effective as

a. the marginal propensity to save increases
b. the interest sensitivity of money demand increases
c. the interest sensitivity of investment decreases
d. the income tax rate decreases
e. none of the above

24. When the LM is vertical, then

a. the monetary policy multiplier is zero
b. monetary policy is at its weakest but fiscal policy has a maximal
effect
c. monetary policy has a maximal effect, but fiscal policy has no
effect on income
d. fiscal policy’s impact on interest rates will not affect investment
e. monetary policy affects interest rates but no change in investment
spending results

25. If investment is very interest insensitive, then

a. the fiscal policy will be largely ineffective
b. monetary policy will be very effective
c. the economy will be in the classical case
d. monetary policy cannot be used to lower interest rates
e. expansionary fiscal policy ill not crowd out much private
spending

26. Assume the government implements a spending cut and the

State Bank responds by increasing money supply. Which is MOST
likely to occur?
a. lower interest rates and a higher budget surplus
b. lower interest rates and a higher budget deficit
c. a decrease in investment and net exports
d. a higher budget surplus and lower tax revenues
e. both a. and d.

27. Assume the government wants to keep the income roughly

the same but change the composition of output from consumption
towards investment. Which policy mix do you suggest?
a. a decrease in transfer payments to households combined
with open market purchases by the State Bank
b. a cut in income taxes combined with open market sales by the
State Bank
c. expansionary fiscal policy combined with restrictive monetary
policy
d. a reduction in investment tax credits
e. a reduction in the income tax rate

28. In a normal IS-LM framework, if government purchases and

taxes are both increased by the same amount, then
a. income will increase by exactly that amount
b. income will remain the same since IS curve is unaffected
c. income will only increase if State Bank also increases money
supply
d. income and the interest rate will both increase
e. income will remain the same, but consumption will decrease

29. In an IS-LM model, if we change from a closed economy

where NX = 0 to an open economy where NX = NX0 – mY (where m
> 0), then
a. the IS curve will become steeper and shift to left
b. the IS curve will become flatter and shift to right
c. the LM curve will become steeper and shift to left
d. the LM curve will become steeper and shift to right
e. the fiscal policy multiplier will become larger

30. In a normal IS-LM framework, crowding out may be avoided

if
a. banks ration credit
b. the government matches a tax increase with an increase in
government purchases
c. the State Bank increases money supply to accommodate
fiscal expansion
d. the Sate Bank sells government bonds on a large scale
e. both c. and d.