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1. John Maynard Keynes wrote that responsibility for low income and high unemployment
in economic downturns should be placed on:
A) low levels of capital.
B) an untrained labour force.
C) inadequate technology.
D) low aggregate demand.
4. The variable that links the market for goods and services and the market for real money
balances in the IS–LM model is the:
A) consumption function.
B) interest rate.
C) price level.
D) nominal money supply.
5. In the IS–LM model, which two variables are influenced by the interest rate?
A) supply of nominal money balances and demand for real balances
B) demand for real balances and government purchases
C) supply of nominal money balances and investment spending
D) demand for real money balances and investment spending
Page 1
6. Two interpretations of the IS–LM model are that the model explains:
A) the determination of income in the short run when prices are fixed, or what shifts
the aggregate demand curve.
B) the short-run quantity theory of income, or the short-run Fisher effect.
C) the determination of investment and saving, or what shifts the liquidity preference
schedule.
D) changes in government spending and taxes or the determination of the supply of
real money balances.
7. The IS curve plots the relationship between the interest rate and ______ that arises in the
market for ______.
A) national income; goods and services
B) the price level; goods and services
C) national income; money
D) the price level; money
10. In the Keynesian-cross model, actual expenditures differ from planned expenditures by
the amount of:
A) liquidity preference.
B) the government-purchases multiplier.
C) unplanned inventory investment.
D) real money balances.
Page 2
12. When planned expenditure is drawn on a graph as a function of income, the slope of the
line is:
A) zero.
B) between zero and one.
C) one.
D) greater than one.
13. When drawn on a graph with Y along the horizontal axis and E along the vertical axis,
the line showing planned expenditures rises to the:
A) right with a slope less than one.
B) right with a slope greater than one.
C) left with a slope less than one.
D) left with a slope greater than one.
14. The equilibrium condition in the Keynesian-cross analysis in a closed economy is:
A) income equals consumption plus investment plus government spending.
B) planned expenditure equals consumption plus planned investment plus government
spending.
C) actual expenditure equals planned expenditure.
D) actual saving equals actual investment.
16. With planned expenditure and the equilibrium condition Y = PE drawn on a graph with
income along the horizontal axis, if income exceeds expenditure, then income is to the
______ of equilibrium income and there is unplanned inventory ______.
A) right; decumulation
B) right; accumulation
C) left; decumulation
D) left; accumulation
Page 3
17. According to the analysis underlying the Keynesian cross, when planned expenditure
exceeds income:
A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.
19. (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and
expenditure are:
A) Y1 and PE1.
B) Y2 and PE2.
C) Y3 and PE3.
D) Y3 and PE4.
Page 4
20. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then
inventories will ______ inducing firms to ______ production.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease
21. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then
inventories will ______ inducing firms to ______ production.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease
22. The government-purchases multiplier indicates how much ______ change(s) in response
to a $1 change in government purchases.
A) the budget deficit
B) consumption
C) income
D) real balances
23. In the Keynesian-cross model, if the MPC equals .75, then a $1 billion increase in
government spending increases planned expenditures by ______ and increases the
equilibrium level of income by ______.
A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion
24. According to the Keynesian-cross analysis, when there is a shift upward in the
government-purchases schedule by an amount G and the planned expenditure schedule
by an equal amount, then equilibrium income rises by:
A) one unit.
B) G.
C) G divided by the quantity one minus the marginal propensity to consume.
D) G multiplied by the quantity one plus the marginal propensity to consume.
Page 5
25. In the Keynesian-cross model, if government purchases increase by 100, then planned
expenditures ______ for any given level of income.
A) increase by 100
B) increase by more than 100
C) decrease by 100
D) increase, but by less than 100
26. In the Keynesian-cross model, if government purchases increase by 250, then the
equilibrium level of income:
A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases, but by less than 250.
27. In the Keynesian-cross model, fiscal policy has a multiplied effect on income because
fiscal policy:
A) increases the amount of money in the economy.
B) changes income, which changes consumption, which further changes income.
C) is government spending and, therefore, more powerful than private spending.
D) changes the interest rate.
28. According to the Keynesian-cross analysis, if MPC stands for marginal propensity to
consume, then a rise in taxes of T will:
A) decrease equilibrium income by T.
B) decrease equilibrium income by T/(1 – MPC).
C) decrease equilibrium income by (T)(MPC)/(1 – MPC).
D) not affect equilibrium income at all.
29. In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures
______ for any given level of income.
A) increase by 100
B) increase by more than 100
C) decrease by 100
D) increase, but by less than 100
Page 6
30. In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of
income:
A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases, but by less than 250.
31. The tax multiplier indicates how much ______ change(s) in response to a $1 change in
taxes.
A) the budget deficit
B) consumption
C) income
D) real balances
32. In the Keynesian-cross model with a given MPC, the government-expenditure multiplier
______ the tax multiplier.
A) is larger than
B) equals
C) is smaller than
D) is the inverse of the
33. In the Keynesian-cross model, if the MPC equals .75, then a $1 billion decrease in taxes
increases planned expenditures by ______ and increases the equilibrium level of income
by ______.
A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion
34. Both Keynesians and supply-siders believe a tax cut will lead to growth:
A) and both agree it works through incentive effects.
B) but Keynesians believe it works through incentive effects whereas supply-siders
believe it works through aggregate demand.
C) but Keynesians believe it works through aggregate demand whereas supply-siders
believe it works through incentive effects.
D) and both agree it works through aggregate demand.
Page 7
35. Tax cuts stimulate ______ by improving worker's incentive and expand ______ by
raising households' disposable income.
A) velocity; demand for loanable funds
B) demand for loanable funds; velocity
C) aggregate demand; aggregate supply
D) aggregate supply; aggregate demand
36. In the Keynesian-cross model, the equilibrium level of income is determined by:
A) the factors of production.
B) the money supply.
C) planned spending.
D) liquidity preference.
37. In the Keynesian-cross model, what adjusts to move the economy to equilibrium
following a change in exogenous planned spending?
A) planned spending
B) the interest rate
C) production
D) the price level
38. In the Keynesian-cross model, a realistic value for the expenditure multiplier is:
A) 5.0.
B) 2.5.
C) 1.5.
D) 0.5.
39. All of the following items shrink the expenditure multiplier in the Keynesian-cross
model except:
A) savings.
B) imports.
C) transfers, such as Canada Pension Plan receipts.
D) taxes.
Page 8
41. The simple investment function shows that investment ______ as ______ increases.
A) decreases; the interest rate
B) increases; the interest rate
C) decreases; government spending
D) increases; government spending
43. An explanation for the slope of the IS curve is that as the interest rate increases, the
quantity of investment ______, and this shifts the expenditure function ______, thereby
decreasing income.
A) increases; downward
B) increases; upward
C) decreases; upward
D) decreases; downward
44. In the Keynesian-cross model, a decrease in the interest rate ______ planned investment
spending and ______ the equilibrium level of income.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
45. When drawn on a graph with income along the horizontal axis and the interest rate
along the vertical axis, the IS curve generally:
A) is vertical.
B) is horizontal.
C) slopes upward and to the right.
D) slopes downward and to the right.
Page 9
46. Along any given IS curve:
A) tax rates are fixed, but government spending varies.
B) government spending is fixed, but tax rates vary.
C) both government spending and tax rates vary.
D) both government spending and tax rates are fixed.
47. The IS curve shifts when all of the following economic variables change except:
A) the interest rate.
B) government spending.
C) tax rates.
D) the marginal propensity to consume.
48. An increase in government spending generally shifts the IS curve, drawn with income
along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
49. If investment does not depend on the interest rate, then the ______ curve is ______.
A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal
51. Along an IS curve all of the following are always true except:
A) planned expenditures equal actual expenditures.
B) planned expenditures equal income.
C) the demand for real balances equals the supply of real balances.
D) demand and supply of loanable funds are equal.
Page 10
52. The IS curve shows combinations of ______ that are consistent with equilibrium in the
market for goods and services:
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances
53. An interpretation of why the IS curve slopes downward and to the right is that as income
rises, national saving rises, and this increase drives the interest rate:
A) down, thereby decreasing investment.
B) down, thereby increasing investment.
C) up, thereby decreasing investment.
D) up, thereby increasing investment.
54. When drawn with the interest rate on the vertical axis and income on the horizontal axis,
the IS curve will be steeper the:
A) larger the level of government spending.
B) smaller the level of government spending.
C) greater the sensitivity of investment spending to the interest rate.
D) smaller the sensitivity of investment spending to the interest rate.
56. An increase in taxes shifts the IS curve, drawn with income along the horizontal axis
and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
Page 11
57. Based on the Keynesian model, one reason to support spending increases over tax cuts
as measures to increase output is that:
A) government spending increases the MPC more than tax cuts.
B) the government-spending multiplier is larger than the tax multiplier.
C) government-spending increases do not lead to unplanned changes in inventories,
but tax cuts do.
D) increases in government spending increase planned spending, but tax cuts reduce
planned spending.
58. One argument in favour of tax cuts over spending on infrastructure to increase
production is that:
A) tax cuts increase the MPC by a larger amount than spending on infrastructure.
B) tax cuts increase planned spending, but spending on infrastructure offsets private
spending.
C) the tax multiplier is larger than the government spending multiplier.
D) it takes longer to implement spending on infrastructure than to implement tax cuts.
60. A given increase in taxes shifts the IS curve more to the left the:
A) larger the marginal propensity to consume.
B) smaller the marginal propensity to consume.
C) larger the government spending.
D) smaller the government spending.
61. If neither investment nor consumption depends on the interest rate, then the IS curve is
______ and ______ policy has no effect on output.
A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal
Page 12
62. If investment demand is infinite below some certain r (e.g., r**) and zero above r**,
then the IS curve is ______ and ______ policy has no effect on output.
A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal
64. In the loanable funds model, a decrease in income ______ national saving and ______
the equilibrium interest rate.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
65. In the Keynesian-cross model, as the interest rate increases, the equilibrium level of
income ______, whereas in the loanable funds model, as the level of income increases,
the equilibrium level of the interest rate ______.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Page 13
Use the following to answer questions 67-69:
67. (Exhibit: Keynesian Cross and Loanable Funds) Both graphs illustrate the inverse
relationship between the equilibrium interest rate and the equilibrium level of income.
The economy moves from equilibrium A to equilibrium B in the Keynesian-cross
diagram as a result of a(n) ______ that shifts planned expenditures.
A) increase in income
B) decrease in income
C) increase in the interest rate
D) decrease in the interest rate
68. (Exhibit: Keynesian Cross and Loanable Funds) Both graphs illustrate the inverse
relationship between the equilibrium interest rate and the equilibrium level of income.
The economy moves from equilibrium A to equilibrium B in the Loanable Funds
diagram as a result of a(n) ______ that shifts saving.
A) increase in income
B) decrease in income
C) increase in the interest rate
D) decrease in the interest rate
Page 14
69. (Exhibit: Keynesian Cross and Loanable Funds) Both graphs illustrate the inverse
relationship between the equilibrium interest rate and the equilibrium level of income.
Planned expenditures increase in the Keynesian-cross model as a result of ______, and
saving increases in the loanable funds model as a result of ______.
A) an increase in taxes; an increase in real money balances
B) a decrease in the interest rate; an increase in income
C) a decrease in velocity; an increase in government spending
D) an increase in the interest rate; a decrease in income
70. A rise in government spending shifts the IS curve because it ______ national saving for
any given level of income, and this ______ the interest rate for any given level of
income.
A) reduces; reduction lowers
B) reduces; reduction raises
C) increases; increase raises
D) increases; increase lowers
71. When the LM curve is drawn, the quantity that is held fixed is:
A) the nominal money supply.
B) the real money supply.
C) government spending.
D) the tax rate.
72. According to the theory of liquidity preference, the supply of real money balances:
A) decreases as the interest rate increases.
B) increases as the interest rate increases.
C) increases as income increases.
D) is fixed.
73. According to the theory of liquidity preference, the supply of nominal money balances:
A) is chosen by the central bank.
B) depends on the interest rate.
C) varies with the price level.
D) changes as the level of income changes.
Page 15
75. If the interest rate is above the equilibrium value, the:
A) demand for real balances exceeds the supply.
B) supply of real balances exceeds the demand.
C) market for real balances clears.
D) demand for real balances increases.
76. According to the theory of liquidity preference, if the supply of real money balances
exceeds the demand for real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing
money.
C) purchase more goods and services.
D) be content with their portfolios.
77. According to the theory of liquidity preference, if the demand for real money balances
exceeds the supply of real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing
money.
C) purchase fewer goods and services.
D) be content with their portfolios.
Page 16
78. (Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels
of interest rates and real money balances are:
A) r1 and M1/P1.
B) r2 and M2/P2.
C) r3 and M2/P2.
D) r3 and M3/P3.
79. (Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1,
then people will ______ bonds and the interest rate will ______.
A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall
80. (Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3,
then people will ______ bonds and the interest rate will ______.
A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall
81. The theory of liquidity preference implies that, other things being equal, an increase in
the real money supply will:
A) lower the interest rate.
B) raise the interest rate.
C) have no effect on the interest rate.
D) first lower and then raise the interest rate.
Page 17
83. According to the theory of liquidity preference, tightening the money supply will
______ nominal interest rates in the short run, and according to the Fisher effect,
tightening the money supply will ______ nominal interest rates in the long run.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
84. Reducing the money supply ______ nominal interest rates in the short run, and ______
nominal interest rates in the long run.
A) produces no change in; raises
B) raises; produces no change in
C) raises; lowers
D) lowers; raises
85. In the liquidity preference model, what adjusts to move the money market to
equilibrium following a change in the money supply?
A) planned spending
B) the interest rate
C) production
D) the price level
86. The theory of liquidity preference implies that the quantity of real money balances
demanded is:
A) negatively related to both the interest rate and income.
B) positively related to both the interest rate and income.
C) positively related to the interest rate and negatively related to income.
D) negatively related to the interest rate and positively related to income.
87. With the real money supply held constant, the theory of liquidity preference implies that
a higher income level will be consistent with:
A) no change in the interest rate.
B) a lower interest rate.
C) a higher interest rate.
D) first a lower and then a higher interest rate.
Page 18
88. According to the theory of liquidity preference, holding the supply of real money
balances constant, an increase in income will ______ the demand for real money
balances and will ______ the interest rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
89. If money demand does not depend on income, then the ______ curve is ______.
A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal
90. If money demand is extremely sensitive to the interest rate, then the ______ curve is
______.
A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal
93. The LM curve is steeper the ______ the interest sensitivity of money demand and the
______ the effect of income on money demand.
A) greater; greater
B) greater; smaller
C) smaller; smaller
D) smaller; greater
Page 19
94. If the demand function for money is M/P = 0.5Y – 100r, then the slope of the LM curve
is:
A) 0.001.
B) 0.005.
C) 0.01.
D) 0.05.
95. If money demand does not depend on the interest rate, then the LM curve is ______ and
______ policy has no effect on output.
A) horizontal; fiscal
B) vertical; fiscal
C) horizontal; monetary
D) vertical; monetary
96. If the demand function for money is M/P = 0.5Y – 100r and if M/P increases by 100,
then the LM curve for any given interest rate shifts to the:
A) left by 100.
B) left by 200.
C) right by 100.
D) right by 200.
98. A decrease in the real money supply, other things being equal, will shift the LM curve:
A) downward and to the left.
B) upward and to the left.
C) downward and to the right.
D) upward and to the right.
Page 20
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“In this condition of mind and body he remained in the city for
some time, wandering about here and there; until one day, while
standing at the Worsham House corner, he became involved in a
quarrel with one James Dolan, a member of the Eighth Missouri
Regiment, a large and powerful man, while Black was a man of
medium height and stature. Words between the parties waged
furious, and finally Dolan struck Black with a cane which he had with
him; but quickly warding off the blow, Black wrenched the cane from
his adversary and dealt him a blow, which so fractured the skull of
Dolan as to cause death within a short time thereafter. Black effected
his escape from the city, and with a couple of accomplices, began a
system of wholesale murder and robbery on the Hernando road. The
atrocity and boldness of these acts created the greatest excitement
in Memphis.
“Several parties were robbed of sums varying from one to as high
as ten thousand dollars, and, in one instance, a speculator was
compelled to disgorge to the amount of five thousand dollars in gold.
Of course, these rascals, of whom Black was the leader, often met
with men who would make resistance rather than give up their
money; and in this way no less than three or four fell victims to the
fiendish spirit exhibited by these scoundrels. It was finally agreed
upon by the military commanders of the district, on both sides, that
means should be taken which would insure their capture.
Accordingly a squad of Blythe’s battalion, of the rebel army, were
sent in pursuit, and succeeded in capturing, about ten miles out of
the city, Black and his companion, a fellow young in years, named
Whelan. They were placed in the guard-house in Hernando, we
believe, and at a pre-concerted signal attacked the guard, and
mounting some horses belonging to the soldiers, made off at a rapid
rate. The guard immediately started in pursuit, and coming upon
Whelan, who was some distance behind Black, shot and killed him.
Black again escaped, and applied himself with more vigor than ever
to the plundering, stealing and robbing of everybody and everything
that came within his reach. He would frequently ride into this city at
night, passing through the lines at will; and, as an instance of his
audacity, on one occasion rode down Adams street, and fired
several shots into the station house. It was reported that he had
accumulated large sums of money, and the report proved correct. As
his business became either too tiresome or too dangerous, he came
to the city, disguised, and took passage on a boat for the North.
Since that time, and until recently, nothing has been heard from him.
It seems that after leaving Memphis, he went to St. Paul, Minnesota,
and embarked in the staging and saloon business, under his proper
name, John Keene. His restless spirit could not stand the monotony
of such a dull business (to him), and, organizing a band of some
twenty men, he started for the Territories.”
CHAPTER XXIX.
capture and execution of jake silvie alias
jacob seachriest, a road agent and murderer
of twelve years standing, and the slayer of
twelve men.