Macro Economics Question
Macroeconomics Exam – Bachelor Level Instructions: Choose the most appropriate answer for the quizzes and provide detailed responses for open questions. Part A: Multiple Choice Questions 1. If the aggregate supply curve is vertical: A) Changes in aggregate demand affect prices but not output. B) Changes in aggregate demand affect output but not prices. C) Changes in aggregate demand do not affect prices or output. D) None of the above are correct. 2. Which of the following best defines the natural rate of unemployment? A) The rate of unemployment when the economy is at its potential output. B) The rate of unemployment including frictional and cyclical unemployment. C) The rate of unemployment when the economy is in a recession. D) The rate of unemployment that includes only structural unemployment. 3. An increase in government spending will shift the: A) Aggregate demand curve to the left. B) Aggregate supply curve to the left. C) Aggregate demand curve to the right. D) Aggregate supply curve to the right. 4. Which of the following would be considered a contractionary fiscal policy? A) An increase in government spending. B) A decrease in taxes. C) An increase in taxes. D) A decrease in interest rates. 5. The liquidity trap refers to a situation where: A) The interest rate is so low that monetary policy becomes ineffective in further lowering it. B) The interest rate is so high that fiscal policy becomes ineffective. C) Inflation is so high that real interest rates become negative. D) Unemployment is so low that it causes hyperinflation. Page 1 Macroeconomics Exam – Bachelor Level Part B: Open-Ended Questions 1. Suppose the economy is initially at equilibrium with the following values: Autonomous consumption = 150, MPC = 0.75, Planned investment = 100, Government spending = 200, Taxes = 100. Calculate the initial equilibrium income. Now assume the government increases spending by 50. Calculate the new equilibrium income. Draw the aggregate demand curve before and after the increase in government spending. 2. Using the IS-LM model, analyze the impact of an increase in money supply on interest rates and output under normal circumstances and under a liquidity trap. Include a diagram of the IS-LM model showing shifts in the LM curve and a brief explanation of the economic intuition behind the shifts and their impact on the economy. 3. Consider an open economy where the marginal propensity to import (MPM) is 0.2, and the exchange rate is initially 1.5 domestic currency per foreign currency unit. The government decides to devalue the domestic currency to 1.8 per unit. Calculate the effect on net exports if total domestic income is 5000 and total foreign income is 6000. Discuss how this currency devaluation affects the aggregate demand curve. Draw the new aggregate demand curve assuming no other changes. 4. Analyze the effects of a tax cut from 25% to 20% on consumption and savings in an economy, assuming the following: Disposable income initially is 1000 units. Consumption function: C = 200 + 0.8(Y – T). Calculate the new levels of consumption and savings. Draw and explain the changes in the consumption function graphically. Page 2
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