Principle of Macroeconomics Prof. M. El-Sakka Dept. of Economics College of Business Administration

Quiz # 4 VERSION A

1. Refer to the above diagram for a private closed economy. The equilibrium level of GDP is: A. $400. B. $300. C. $200. D. $100. Answer: B 2. Refer to the above diagram for a private closed economy. At the equilibrium level of GDP, investment and saving are both: A. $50. B. $100. C. $20. D. $40. Answer: A 3. Refer to the above diagram for a private closed economy. The $400 level of GDP is: A. that output at which saving is zero. B. too high because consumption exceeds investment. C. unstable because aggregate expenditures exceed GDP. D. unstable because aggregate expenditures are less than GDP. Answer: D

4. Refer to the above diagram for a private closed economy. Unplanned changes in inventories will be zero: A. only at the $300 level of GDP. B. only at the $200 level of GDP. C. at all levels of GDP. D. only at the $400 level of GDP. Answer: A 5. A private closed economy will expand when: A. actual GDP is less than potential GDP. B. unplanned decreases in inventories occur. C. aggregate expenditures are less than GDP. D. unplanned increases in inventories occur. Answer: B 6. A private closed economy includes: A. households, businesses, and government, but not international trade. B. households, businesses, and international trade, but not government. C. households and businesses, but not government or international trade. D. households only. Answer: C 7. All else equal, a large decline in the business taxes will shift the: A. investment demand curve leftward. B. investment demand curve rightward. C. investment schedule upward. D. investment schedule downward. Answer: B 8. If unintended increases in business inventories occur, we can expect: A. a decline in GDP and rising unemployment. B. inflation. C. an increase in consumption. D. an offsetting increase in planned investment. Answer: A 9. Imports have the same effect on the current size of GDP as: A. exports. B. investment. C. consumption. D. saving. Answer: D 10. At the equilibrium GDP for a private open economy: A. net exports may be either positive or negative. B. imports will always exceed exports. C. exports will always exceed imports. D. exports and imports will be equal. Answer: A 11. Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by: A. $100 billion. B. $90 billion. C. $40 billion. D. $50 billion. Answer: C 12. Which of the following would increase GDP by the greatest amount? A. a $20 billion reduction in taxes B. $20 billion increases in both government spending and taxes C. $20 billion decreases in both government spending and taxes D. a $20 billion increase in government spending Answer: D 13. If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will: A. decrease GDP by $20. B. decrease GDP by $40. C. increase GDP by $20. D. increase GDP by $40. Answer: C