YEAR I-MID-SEMESTER II TEST II

INTRODUCTION TO MACROECONOMICS
DURATION: 1 hour
Instructions
 Answer all questions in part I
 Choose any one question in part II
 Be neat and orderly in presentation of your working

PART I: SELECT ONE CHOICE QUESTIONS

1) Which of the following is an example of active fiscal policy?

A. Government expenditures rise during a recession because unemployment insur-
ance benefits increase.
B. The government runs a budget deficit during a recession because income tax col-
lections fall.
C. Congress passes a tax cut after the beginning of a recession with the aim of stimu-
lating the economy.
D. all of the above
E. none of the above
2) Negative net exports means that
A. the country sells more goods abroad than it buys from other countries.
B. the country buys more goods from other countries than it sells to other countries.
C. the country has a closed economy.
D. the country’s tariffs are too low.
E. both c and d
3) The GDP deflator is
A. (Real GDP x 100)/(Nominal GDP).
B. (Nominal GDP x 100)/(Real GDP).
C. (Nominal GDP)/(Real GDP).
D. (Real GDP)/(Nominal GDP).
E. none of the above.
4) The aggregate supply-aggregate demand model predicts that an unexpected increase in
government spending will have what short-run effects?
A. A decrease in the price level and an increase in real output.
B. A decrease in the price level and no effect on real output.
C. An increase in the price level and a decrease in real output.
D. A decrease in both the price level and real output.
E. An increase in both the price level and real output.
5) In economics, “National Saving” is calculated by

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 A. Subtracting private consumption and investment from total income.
B. Subtracting credit card debt from the total value of stock market investments.
C. Combining the total value of savings accounts with stock market investments.
D. Subtracting private and government consumption from total income.
6) None of the above.
A. Which of the following is NOT one of the components of aggregate demand?
B. Consumption spending.
C. Investment spending.
D. Government purchases of goods and services.
E. Money supply.
F. Net exports.
7) Which of the following is not included in a country’s Gross Domestic Product (GDP)?
A. the value of final goods sold
B. the value of final services sold
C. the value of investment
D. the value of government expenditures
E. the value of household production in the economy
8) Which of the following statements are correct?
A. Economists using the classical dichotomy distinguish between variables measured
in monetary units from those measured in physical units.
B. Real variables are variables measured in monetary units.
C. Nominal variables are variables measured in physical units.
D. a is false, but b and c are both correct.
E. a, b, and c are all correct.
9) The quantity equation relates a measure of the money supply (M), to the velocity of
money (V), the GDP deflator (P) and real GDP (Y). Which of the following expression
accurately describes the quantity equation?
A. MY = PV
B. MP = VY
C. MV = PY
D. M/P = V/Y
E. None of the above describes the quantity equation.
10) The principle of effective demand states that equilibrium is achieved when:
A. Aggregate demand equals zero.
B. Aggregate demand exceeds aggregate supply.
C. Aggregate demand equals aggregate supply.
D. Aggregate demand is less than aggregate supply.
E. None of the above.
11) The aggregate demand function relates:
A. The level of employment to the expected proceeds from the sale of production.
B. The level of savings to the investment in the economy.
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 C. The level of taxation to government spending.
D. The level of exports to imports.
E. None of the above.
12) Effective demand helps in determining:
A. The level of unemployment.
B. The level of inflation.
C. The level of government debt.
D. The level of investment.
E. All of the above.

PART II: STRUCTURED SHORT ESSAY QUESTIONS:-attempt any one

Question 13
a) Explain the concept of effective demand according to Keynes. How is it determined
in an economy?

b) Describe the role of each sector in the economy: household sector, business sector,
government sector, and foreign/external sector.
Question 14
a) Suppose consumption spending is 4600 units, Investment spending is 500 units, Govern-
ment spending is 935 units, exports is 630 and imports are 600 units. Find the domestic
output.
b) Given the consumption function 𝐶 = 200 + 0.8𝑌 and 𝐼 = 400, Calculate the aggregate
level of national income using;
(i) Aggregate demand approach
(ii) Saving-Investment approach (Hint; express the equation in terms of 𝐶,
find 𝑀𝑃𝐶, use the intercept of 𝐶)

END

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