Question

1. In the short-run IS-LM model with income taxation, taxes are given by ?=? +??. Suppose that MPC = 0.75 and the marginal tax rate ?=0.2. Then, when ? decreases by 1000, then for any given interest rate, the IS curve shifts:

Select one:

a. to the left by 1000.

b. to the right by 3000.

c. to the right by 3750

d. to the right by 1875.

2.

Suppose that the adult population in an economy is 28 million, total employment is 17 million and there are 1 million people unemployed. What is the rate of unemployment?

Select one:

a. 6.5%

b. 3.5%

c. 5.5%

d. 7.5%

3.Consider the long-run model of the economy. Assume that the consumption function is given by C = 150 + 0.85(Y – T), the tax function is given by ?=? +?Y, and Y is 5,000. If ? decreases from 0.3 to 0.2, then consumption increases by:

Select one:

a. 235

b. 500

c. 425

d. 85

4.

Consider the following short-run IS-LM model described by equations (1) through (6):
(1) C = 200 + 0.8(Y – T);
(2) T = 800;
(3) G = 500;
(4) I = 700 – 25 r ;
(5) Y = C + I + G ;
(6) M/P = 0.6Y – 60r  
where the nominal money supply is M=600 and the price level is P = 1. (There are only lump-sum taxes in this model). Then, in the short run, the equilibrium interest rate for the economy is given by:

Select one:

a. r* = 9.56 percent

b. r* = 10.42 percent

c. r* = 12.44 percent

d. r* = 8.28 percent

5.

Consider an economy that may be represented by the following short-run IS-LM model described by equations (1) through (6):

(1) C = 200 + 0.8(Y – T)

(2) T = 800

(3) G = 500

(4) I = 700 – 25 r

(5) Y = C + I + G

(6) M/P = 0.6Y – 60r where the nominal money supply is M=600 and the price level is P = 1. (There are only lump-sum taxes in this model). Suppose that the government increases its expenditures by 100 units, but the Bank of Canada would like to maintain the interest rate constant. Then, (approximately)

Select one:

a. the money supply must decrease by 100 units and equilibrium output increases by 250 units.

b. the money supply must increase by 60 units and equilibrium output increases by 100 units.

c. the money supply must increase by 300 units and equilibrium output increases by 500 units

d. the money supply must decrease by 125.5 units and equilibrium output increases by 200 units.

6.

	Price (2015, base year)	Quantity (2015, base year)	Price (2019)	Quantity (2019)
Ice-cream boxes	$ 12	1600	$ 26	1300
Watermelon	$ 24	400	$ 18	1200

Consider the table above. Assume that the basket of goods consumed by a middle-income urban household is made up of ice-cream boxes and watermelon consumed in 2015. If the CPI for 2018 was 163.3, then the rate of inflation between 2018 and 2019 was:

Select one:

a. 3.74%

b. 2.27

c. 1.95

d. 1.24

7. Consider the long-run model of the economy. The production function is given by ?=50?^0.5?^0.5, where ?=100. If ? increases from 100 to 144, then the real wage rate:

Select one:

a. falls by 8.7% while the real rental rate rises by 9.5%

b. rises by 4.4% while the real rental rate falls by 3.2%

c. rises by 12% while the real rental rate falls by 5%

d. and the rental rate both rise by 12%

8.

Consider an economy that is initially in long-run equilibrium. If the Central Bank (CB) decides to decrease the money supply, then the following events will occur:

Select one:

a. in the short run, the aggregate-demand curve shifts to the left, the price level rises and output falls; in the long-run, the aggregate-demand curve gradually shifts back to the right and output returns to its long-run (full-employment) equilibrium level.

b. in the short run, the aggregate-demand curve shifts to the right and output rises; in the long-run the price level gradually adjusts upward, and output returns to its long-run (full-employment) equilibrium level.

c. in the short run the aggregate-demand curve shifts to the left and output falls; in the long-run the price level gradually adjusts downward, and output returns to its long-run (full-employment) equilibrium level.

d. in the short run, the aggregate-demand curve shifts to the left and output falls; long-run equilibrium cannot be restored unless the CB increases the money supply back to its original level.

9.

Suppose that business confidence suddenly decreases. In the short-run IS-LM model, this shock (i)___________. However, if the Bank of Canada wishes to “stabilize” the economy and keep output constant, then (ii)_____________. As a result, (iii)_____________________.

Select one:

a. (i)shifts the IS curve to the left and output falls. (ii) the money supply must increase. (iii) investment decreases, and consumption decreases as well.

b. (i)shifts the IS curve to the left and output falls. (ii) the money supply must increase. (iii) investment increases, and consumption remains unchanged.

c. (i)shifts the IS curve to the right and output rises. (ii) the money supply must decrease. (iii) investment decreases, and consumption remains unchanged.

d. (i)shifts the IS curve to the left and output falls. (ii) the money supply must decrease. (iii) both consumption and investment remain unchanged.

10.

In the short-run IS-LM model, in the usual case, an expansionary fiscal policy action on the part of the government will cause the interest rate ______ and output ______.

Select one:

a. to rise; to fall

b. to fall; to fall

c. to rise; to rise

d. to fall; to rise

Answer 1

1.

Change in Y due to change in Tax= Change in tax X [-MPC/(1-MPC+MPC*t)]

Change in Y due to change in Tax= -1000 x [-0.75/1-0.75+0.75 x 0.2]

Change in Y due to change in Tax= -1000 x [-0.75/0.40]

Change in Y due to change in Tax= 1000 x (75/40)= 25 x 75= 1875

Y increases by 1875 which means rightward shift of IS by 1875.

Option d is the correct answer.

2.

Unemployment rate= [Unemployment people / (Unemployment people+employed people)] x 100

Unemployment rate= [1 million / 1 million + 17 million] x 100

Unemployment rate= (1 million / 18 million) x 100= 5.5%

Option c is the correct answer.