Demo Quiz 1 1.

. Suppose the Central Government decides to increase purchases of goods and services, but to reduce transfer payments (such as unemployment allowances) by an equal amount. (a) (b) (c) (d) (e) You would expect equilibrium income to rise You would expect equilibrium income to fall You would expect equilibrium income to remain unchanged Impact on equilibrium income is ambiguous Data is insufficient to comment on impact on equilibrium income

(a)

2. Which of the following statements is true with regard to price indices? (a) GDP deflator measures the cost of buying a fixed basket of goods and services (b) If prices of imports increase, the GDP deflator also increases (c) Consumer Price Index (CPI) measures the prices of a larger basket of goods than the GDP deflator does (d) When automobile production in the economy is relatively large, automobiles receive a relatively larger weight in the computation of the GDP deflator (e) When automobile production in the economy is relatively large, automobiles receive a relatively larger weight in the computation of the CPI (d) 3. At an income level of Rs.20,000 the saving is zero. If the marginal propensity to save (MPS) is 0.3, the autonomous consumption is (a) (b) (c) (d) (e) Rs.4,900 Rs.5,000 Rs.6,000 Rs.7,000 Rs.8,000

(c)

4. The GDP deflator can be used to (a) Reduce the overstatement of economic activity that would occur if we included intermediate production (b) Correct nominal GDP for the contribution to domestic GDP made by foreign owned factors of production (c) Decompose a change in nominal GDP into a change in real GDP and an average change in prices (d) Obtain the factor income flows that result from the economic activity that has produced the GDP (e) Obtain the factor income flows that result from the non-economic activity that has produced the GDP. (c)

5. One reason that the value of the GDP differs from the value of national income is (a) (b) (c) (d) (e) Indirect taxation Property taxation Corporate taxation Personal income taxation Wealth taxation.

(a)

6. The budget surplus will decrease if (a) (b) (c) (d) (e) the level of autonomous investment decreases (due to negative business expectations) the level of autonomous investment increases (due to positive business expectations) welfare spending is decreased the income tax rate is increased government military spending are decreased (a)

7. In an economy, there are three industries X, Y and Z. X sells goods worth of Rs.900 to Y and goods worth Rs.700 to Z. Consumers divide their expenditures equally between Ys goods and Zs goods. If the national product is Rs.2,000, and if there are no other transactions other than mentioned above, the value added by industries Y and Z respectively are (a) (b) (c) (d) (e) Rs.200, Rs.700 Rs.100, Rs.300 Rs.900, Rs.700 Rs.1,000, Rs.1,000 Rs.1,600, Rs.2,000

(b)

8. A reduction in consumer confidence will likely have which of the following effects? (a) (b) (c) (d) (e) A reduction in output, but no change in interest rate An increase in interest rate and increase in output An increase in interest rate and reduction in output A reduction in interest rate and reduction in output A reduction in interest rate and increase in output

(d)

9. Which of the following is not included in GDP?

Answer: (d)

(a) The salary paid to a SC judge (b) The value of housing services enjoyed by homeowners (c) The value-added of a shipping company that transports goods from the factory to retail stores (d) The value of automobile services enjoyed by car owners (e) All of the above are included in GDP 10. All other things equal, if the price of foreign-made cars rises, then the GDP deflator

(a) (b) (c) (d) (e)

and the CPI will rise by equal amounts will rise and the CPI will remain the same will remain the same and the CPI will rise and the CPI will rise by different amounts will fall and CPI will rise

Answer: (c)

11. Suppose that an Italian working in India renounces his Italian citizenship and is granted Indian citizenship. Which of the following will happen? (a) (b) (c) (d) (e) Italian GDP will fall; Indian GNP will rise Italian GNP will fall; Indian GNP will rise Italian GDP will fall; Indian GDP will rise Italian GNP will fall; Indian GDP will rise Indian and Italian GNP and GDP will remain the same

Answer: (b)

12. To obtain national income, start with GNP and subtract (f) (g) (h) (i) depreciation depreciation and indirect business taxes depreciation, indirect business taxes, and corporate profits depreciation, indirect business taxes, corporate profits, and social insurance contributions (j) indirect business taxes Answer: (b)

13. If investment becomes less sensitive to the interest rate, then the (a) (b) (c) (d) (e) LM curve becomes flatter. LM curve becomes steeper. IS curve becomes flatter. IS curve becomes steeper. IS curve becomes flatter and LM curve becomes steeper.

Answer: (d)

14. Which of the following operations is not considered investment? (a) A family builds a house in which it plans to live. (b) A car dealer stores some of this year's models for next year (c) An individual purchases several pieces of newly-manufactured furniture for his new house (d) A firm buys a computer for word processing (e) All of the above are examples of investment expenditure Answer: (c) Answer Questions (15) and (16) based on the following information: Assume you have the following model of the expenditure sector: E = C + I + G + NX

C = Co + cYD YD = Y - TA + TR TA = TAo TR = TRo I = Io G = Go NX = NXo 15. If a decrease in income by Y = 800 leads to a decrease in savings by S = 160, what is the size of the government expenditure multiplier? Answer: (a) (a) (b) (c) (d) (e) 5 6 4 8 2

16. If a decrease in taxes by TA = 400 leads to an increase in income by Y = 1,200, how large is the marginal propensity to save? (a) (b) (c) (d) (e) 0.2 0.25 0.4 0.5 None of the Above

Answer: (b)

17. Which of the following will occur when the central bank pursues expansionary monetary policy? (a) a rightward shift in the money demand curve and a leftward shift in the money supply curve (b) a rightward shift in the money demand curve and a rightward shift in the money supply curve (c) a leftward shift in the money demand curve and a leftward shift in the money supply curve (d) a leftward shift in the money demand curve and a rightward shift in the money supply curve (e) none of the above Answer: (e) 18. The term monetized deficit refers to (a) (b) (c) (d) (e) Government deficit on payments disbursement Net RBI credit to the central government RBIs deficit due to outstanding dues Difference between government payments and receipts in monetary terms Revenue deficit of the government Answer: (b)

19. At the current interest rate, suppose the supply of money is greater than the demand for money. Given this information, we know that: (a) (b) (c) (d) (e) the price of bonds will tend to increase the price of bonds will tend to fall the supply of bonds also equals the demand for bonds production equals demand the goods market is also in equilibrium

Answer: (a)

20. An underdeveloped country, due to lack of an effective Central banking system, has to rely on fiscal policy alone to decide about its economic policies. Here, the term fiscal policy refers to (a) (b) (c) (d) (e) Changes in the quantity of money designed to affect interest rates Policies related to quotas Composition of money supply Revenue and expenditure policies of the government to achieve full employment Measures to control inflation Answer: (d)

21. Which of the following is false? (a) Speculative demand for money varies directly with the interest rate (b) If the frequency at which a person receives income is increased, transaction demand for money increases (c) Transaction demand for money varies positively with income (d) Both (a) and (b) above (e) All of (a), (b) and (c) Answer: (d) 22. If the marginal propensity to consume is zero, a decrease in investment would lead to (a) (b) (c) (d) (e) A decrease in the equilibrium level of income by the same amount No change in the equilibrium level of income An unending downward spiral in the equilibrium level of income An unending upward spiral in the equilibrium level of income An increase in the equilibrium level of income by the same amount

Answer: (a)

23. An increase in taxes (a) Increases the demand for goods and leads to a rightward shift of the IS curve which increases both equilibrium income and interest rates (b) Decreases the demand for goods and leads to a rightward shift of the IS curve which lowers both equilibrium income and interest rates (c) Increases the demand for goods and leads to a leftward shift of the IS curve which lowers both equilibrium income and interest rates

(d) Decreases the demand for goods and leads to a leftward shift of the IS curve which increases both equilibrium income and interest rates. (e) Decreases the demand for goods and leads to a leftward shift of the IS curve which lowers both equilibrium income and interest rates Answer: (e) 24. An increase in the money supply must cause which of the following? (b) (c) (d) (e) (a) a reduction in investment and a rightward shift in the LM curve no change in output if investment is independent of the interest rate no change in the interest rate if investment is independent of the interest rate a reduction in the interest rate and ambiguous effects on investment a leftward shift in the IS curve (b)

25. A reduction in consumer confidence will likely have which of the following effects? (b) (c) (d) (e) (a) A reduction in output, but no change in interest rate An increase in interest rate and increase in output An increase in interest rate and reduction in output A reduction in interest rate and reduction in output A reduction in interest rate and increase in output

(d)

26. The following equations describe an economy C=0.8(1-t) Y t=0.25 I=900-50i G=800 L=0.25Y-62.5i M/P=500 The government expenditure multiplier in this model is (a) (b) (c) (d) (e) 2 2.67 1 1.67 None of the Above

(d)

27. If in response to an increase in government spending, the RBI decides to keep interest rates constant, the government purchases multiplier is (a) (b) (c) (d) (e) smaller than in the case where the RBI keeps the money supply constant larger than in the case where the RBI keeps the money supply constant the same as in the case where the RBI keeps the money supply constant larger or smaller than in the case where the RBI keeps money supply constant becomes zero (b)

28. The slowdown in the U.S. economy in 2001 can be explained by (a) (b) (c) (d) (e) negative shocks to the LM curve resulting in a fall in aggregate demand negative shocks to the IS curve resulting in a fall in aggregate demand negative shocks to the LM curve resulting in a fall in aggregate supply negative shocks to the IS curve resulting in a fall in aggregate supply cannot be explained in the IS-LM framework (b)

29. When there is cost push inflation, the government, in order to keep real GDP constant, is likely to pursue (a) (b) (c) (d) (e) A contractionary monetary and fiscal policy An expansionary fiscal and monetary policy An expansionary fiscal policy and a contractionary monetary policy An expansionary monetary policy and a contractionary monetary policy Only a contractionary monetary policy

(b)

30. Suppose that taxes increase and money supply increases in such a way that output is constant in equilibrium. These policy changes will produce (a) (b) (c) (d) (e) An increase in investment and a decrease in private consumption An increase in investment and a decrease in government spending A decrease in investment and an increase in private saving A decrease in investment and a decrease in private consumption None of the Above is true

(a)

31. Suppose the Government decides to waive off loans for sugarcane farmers. This will lead to a (a) (b) (c) (d) (e) leftward shift of LM curve and a rise in interest rate rightward shift of LM curve and a fall in interest rate leftward shift of IS curve and a rise in interest rate rightward shift of IS curve and a fall in interest rate none of the above is true

(e)

32. A rise in investor confidence due to governments decision to allow FDI in retail sector will likely to have which of the following effects? (a) (b) (c) (d) (e) A reduction in interest rate and increase in output A reduction in output, but no change in interest rate A reduction in interest rate and reduction in output An increase in interest rate and reduction in output An increase in interest rate and increase in output

(e)

33. Which of the following is false?

(a) Precautionary demand for money varies directly with the interest rate (b) A decrease in taxes shifts the IS curve to the left (c) The slowdown in the U.S. economy in 2008 can be explained by negative shocks to the IS curve resulting in a fall in aggregate supply (d) Both (a) and (b) above (e) All of (a), (b) and (c) (e) 34. After a wave of credit card fraud, consumers are using cash more frequently in transactions. Given this information, we know that: (a) the speculative demand for money rises (b) the price of bonds will tend to increase (b) the price of bonds will tend to fall (c) there is no change in the equilibrium level of income (e) the goods market and money market are in equilibrium 35. The following equations describe an economy: AD = C + I + G + NX C = 110 + (2/3) YD YD = Y - TA + TR TA = (1/4) Y + 20 TR = 80 I = 250 - 5i G = 130 NX = -30 MS = 1000 P =2 Md = (1/2) Y + 400 - 20i [MS = nominal money supply; Md = demand for real balances] How much of private domestic investment will be crowded out if government purchases are increased by 80 units? (a) (b) (c) (d) (e) 5 units 12 units 16 units 20 units None of the above

(c)

(c)

36. The following equations describe an economy: AD = C + I + G + NX C = 110 + (2/3) YD YD = Y - TA + TR

TA = (1/4) Y + 20 TR = 80 I = 250 - 5i G = 130 NX = -30 MS = 1000 P =2 Md = (1/2) Y + 400 - 20i [MS = nominal money supply; Md = demand for real balances] By how much the RBI would have to change real money supply to keep interest rates constant if government purchases are increased by 80 units? (a) (b) (c) (d) (e) increase by 50 units increase by 80 units decrease by 30 units increase by 50 units None of the above

(b)

37. The budget deficit in India will decrease if (a) SENSEX crashes as deadlock continues in Parliament (b) EU Ministers agree on enhancing bailout fund and to a greater role for the IMF in fighting the debt crisis (c) the government increases the unemployment allowance (d) the income tax rate is decreased (e) government military spending are increased due to cross-border tensions (b) 38. Which of the following statements is / are true? (a) The consumer price index and the GDP-deflator always show the same change in the rate of inflation (b) To obtain national income, start with GDP, add NFIA and then subtract depreciation and corporate profits (c) When you purchase a house rental service in Delhi @ INR 20000 per month, it adds to the GDP and is recorded under consumption expenditure (d) Both (b) and (c) are true (e) None of the statements are true (c) 39. Open market purchases of government bonds by the Reserve bank of India will have the tendency to
(a) Increase interest rate, the money supply and the national income (b) Increase interest rate and the money supply, but decrease national income (c) Increase interest rate and decrease money supply and the national income

(d) Decrease interest rate, but increase money supply and national income (e) Decrease interest rate, the money supply and the national income (d) 40. Which of the following operations is not directly considered as a part of GDP? (a) A family buys a new car for their own use. (b) A textile manufacturer in Tirupur exports newly-made readymade garments to USA worth INR 5 crores. (c) Government increases old-age pension by INR 5000 (d) A firm buys a new computer for word processing (e) All of the above are examples of GDP (c)