EC 302 Final Exam Latest
Questions With Correct Answers
Already Graded A+
1. An increase in the marginal propensity to consume will: - ANSWER Lead
to the consumption function becoming steeper
2. Which of the following are characteristic of Friedman's 'Permanent Income
Hypothesis'? - ANSWER - The main influence on long-run consumption is
some form of long-run average income
- Consumption will tend to be a constant proportion of long-run average
income (permanent income)
3. Inflation/CPI Equation - ANSWER Infaltion t= (CPI t+1 - CPI t)
/CPI t
4. At the optimal level of investment, which of the following relation holds: -
ANSWER P*F(K) = PK(r+d)
5. Marginal benefit of capital = Marginal cost of capital
6. In the Modigliani Life-Cycle Theory, if the number of years to retirement
decreases, life resources will ________ and current consumption will
___________ - ANSWER decrease, decrease
,7. If the Keynesian consumption function is given by C = 150 + 0.60Y, and Y
increases by 1 unit, then savings - ANSWER Increases by 0.40 unit
8. If a pizza Econland has a population of 60 people with 40 of them working
producing a total output of $600,000. The standard of living of Econland
equals ________ while average labor productivity equals ________. -
ANSWER 10000, 15000
9. Standard of Living: Total Output / Population
10.Average Labor Productivity: Total Output / Population of Workers
11.If nominal GDP is $15 trillion and real GDP is $12 trillion, then GDP
deflator is given by: - ANSWER 125, and this indicates that the price level
has increased 25% since the base year
12.GDP Deflator: Nominal / Real *100
13.Michigan began indexing its minimum wage to inflation in 2010.
Consequently, when the inflation rate is 5%, minimum wage earners in
Michigan who are able to stay employed can expect
____________________________. - ANSWER A nominal wage increase
of 5%
14.Suppose that the base year for CPI is 2014. The cost of the CPI basket in
2014 is $50; the cost of the basket in 2015 was $60, and the cost of the
basket in 2016 was $66. What was the CPI in 2015? - ANSWER CPI
Basket 2014=50$
CPI Basket 2015=60$
So, 60/50*100 (Take year you want and divide by base year)
,=120
15.According to the quantity theory of money, what is the effect of an increase
in the quantity of money? - ANSWER An increase in the price level
16.Quantity theory of money is given by M V = P Y , here we assume that V
and Y are constant, hence as M ↑ =⇒ P ↑
17.An increase in the sensitivity of money demand to the interest rate: -
ANSWER Makes LM curve flatter.
- The LM equation is given by : M P = kY −hi, where h is the
sensitivity of money demand to interest rate. Hence the equation can
be rewritten as i = kY/ h − M/P *1/ h , so as h increases when all other
remaining constant then k/h decreases, hence slope becomes flatter.
18.Which of the following are characteristic of Keynesian theory of money? -
ANSWER Money can be used for transaction, speculative and precautionary
purpose under Keynesian theory.
19.Money demand is elastic with respect to interest rate
20.Suppose the following changes happen in the IS-LM model;
I. Government increases taxes.
II. Central bank decreases money supply.
III. Exogenous consumption, C0, is increased.
, 21.Which of the following statements is true? - ANSWER If II and III happen,
then the equilibrium interest rate will definitely increase.
- A decrease in money supply shifts the LM curve to the left
22.Hence increasing interest rates whereas increase in C0 will shift the IS curve
to the right, raising interest rate.
Hence when both happens then interest rate will increase for sure.
23.Addition in taxes will shift the IS curve to left, decreasing the interest hence
result can be ambiguous
24.Investment is ___________ related to output and ___________ related to the
interest rate. - ANSWER positively, negatively
25.Which of the following shifts the IS curve to the right? - ANSWER
Decreases in taxes -
26.Decrease in taxes increases agents disposable income
which increases its total output hence shifts the IS to the right.
27.Suppose that the firm has projects it is to undertake, and the internal rates of
return for each project are as below. Given that the market interest rate is
0.13, which of the following projects will be undertaken according to the
view of Keynesian investment theory? - ANSWER .13
28.Using Keynes theory of investment, only those projects will be undertaken
whose return (ρ) is greater than the market interest rate. In the given
question only feasible option is 0.13 >= 0.13
Questions With Correct Answers
Already Graded A+
1. An increase in the marginal propensity to consume will: - ANSWER Lead
to the consumption function becoming steeper
2. Which of the following are characteristic of Friedman's 'Permanent Income
Hypothesis'? - ANSWER - The main influence on long-run consumption is
some form of long-run average income
- Consumption will tend to be a constant proportion of long-run average
income (permanent income)
3. Inflation/CPI Equation - ANSWER Infaltion t= (CPI t+1 - CPI t)
/CPI t
4. At the optimal level of investment, which of the following relation holds: -
ANSWER P*F(K) = PK(r+d)
5. Marginal benefit of capital = Marginal cost of capital
6. In the Modigliani Life-Cycle Theory, if the number of years to retirement
decreases, life resources will ________ and current consumption will
___________ - ANSWER decrease, decrease
,7. If the Keynesian consumption function is given by C = 150 + 0.60Y, and Y
increases by 1 unit, then savings - ANSWER Increases by 0.40 unit
8. If a pizza Econland has a population of 60 people with 40 of them working
producing a total output of $600,000. The standard of living of Econland
equals ________ while average labor productivity equals ________. -
ANSWER 10000, 15000
9. Standard of Living: Total Output / Population
10.Average Labor Productivity: Total Output / Population of Workers
11.If nominal GDP is $15 trillion and real GDP is $12 trillion, then GDP
deflator is given by: - ANSWER 125, and this indicates that the price level
has increased 25% since the base year
12.GDP Deflator: Nominal / Real *100
13.Michigan began indexing its minimum wage to inflation in 2010.
Consequently, when the inflation rate is 5%, minimum wage earners in
Michigan who are able to stay employed can expect
____________________________. - ANSWER A nominal wage increase
of 5%
14.Suppose that the base year for CPI is 2014. The cost of the CPI basket in
2014 is $50; the cost of the basket in 2015 was $60, and the cost of the
basket in 2016 was $66. What was the CPI in 2015? - ANSWER CPI
Basket 2014=50$
CPI Basket 2015=60$
So, 60/50*100 (Take year you want and divide by base year)
,=120
15.According to the quantity theory of money, what is the effect of an increase
in the quantity of money? - ANSWER An increase in the price level
16.Quantity theory of money is given by M V = P Y , here we assume that V
and Y are constant, hence as M ↑ =⇒ P ↑
17.An increase in the sensitivity of money demand to the interest rate: -
ANSWER Makes LM curve flatter.
- The LM equation is given by : M P = kY −hi, where h is the
sensitivity of money demand to interest rate. Hence the equation can
be rewritten as i = kY/ h − M/P *1/ h , so as h increases when all other
remaining constant then k/h decreases, hence slope becomes flatter.
18.Which of the following are characteristic of Keynesian theory of money? -
ANSWER Money can be used for transaction, speculative and precautionary
purpose under Keynesian theory.
19.Money demand is elastic with respect to interest rate
20.Suppose the following changes happen in the IS-LM model;
I. Government increases taxes.
II. Central bank decreases money supply.
III. Exogenous consumption, C0, is increased.
, 21.Which of the following statements is true? - ANSWER If II and III happen,
then the equilibrium interest rate will definitely increase.
- A decrease in money supply shifts the LM curve to the left
22.Hence increasing interest rates whereas increase in C0 will shift the IS curve
to the right, raising interest rate.
Hence when both happens then interest rate will increase for sure.
23.Addition in taxes will shift the IS curve to left, decreasing the interest hence
result can be ambiguous
24.Investment is ___________ related to output and ___________ related to the
interest rate. - ANSWER positively, negatively
25.Which of the following shifts the IS curve to the right? - ANSWER
Decreases in taxes -
26.Decrease in taxes increases agents disposable income
which increases its total output hence shifts the IS to the right.
27.Suppose that the firm has projects it is to undertake, and the internal rates of
return for each project are as below. Given that the market interest rate is
0.13, which of the following projects will be undertaken according to the
view of Keynesian investment theory? - ANSWER .13
28.Using Keynes theory of investment, only those projects will be undertaken
whose return (ρ) is greater than the market interest rate. In the given
question only feasible option is 0.13 >= 0.13
