ECON 102

SPRING 2007- 1ST MIDTERM

1) Which of the following will cause a shift of
the IS curve?
a) an increase in taxes
b) an increase in government spending
c) an increase in consumer confidence
d) all of the above
e) none of the above
2) Which of the following will cause a shift in
the LM curve?
a) an open market purchase of bonds
b) an increase in consumer confidence
c) a reduction in taxes
d) an increase in output
e) all of the above
3) Which of the following will occur if there is
a reduction in consumer confidence?
a) The LM curve will shift rightward.
b) The IS curve will shift rightward.
c) The IS curve will shift leftward.
d) The LM curve will shift leftward.
e) The IS curve will shift leftward LM
curve will rightward
4) Suppose fiscal policy makers implement a
policy to reduce the size of a budget deficit.
Based on the IS-LM model, we know with
certainty that the following will occur as a
result of this fiscal policy action.
a) Investment spending will increase.
b) Investment spending will decrease.
c) Output will increase
d) Investment spending may increase,
decrease, or not change
e) none of the above
5) Suppose the demand for money is NOT very
sensitive to the income. Given this
information, we know that
a) the LM curve should be relatively
flat
b) neither the IS nor the LM curve will
be affected
c) the IS curve should be relatively flat.
d) the IS curve should be relatively steep
e) the LM curve should be relatively
steep.
6) Suppose there is a reduction in consumer
confidence. Which of the following best
represents the list of variables that must
decrease in response to this decline in
consumer confidence?
a) consumption and investment
b) consumption, investment and output

c) output and investment

d) consumption and taxes
e) consumption, and interest rate
7) For this question, assume that investment
spending depends only on the interest rate
and does not depend on output. Given this
information, a reduction in the money supply
a) will have no effect on output
b) will cause investment to increase
c) may cause investment to increase or
to decrease
d) will cause investment to decrease
e) will cause a reduction in output and
have no effect on the interest rate.
8) An increase in the money supply must cause
which of the following?
a leftward shift in the IS curve
no change in the interest rate if investment is
independent of the interest rate
no change in output if investment is
independent of the interest rate
an increase in investment and a rightward shift
in the IS curve
none of the above
9) For this question, assume that investment
spending depends only on output and no
longer depends on the interest rate. Given
this information, an increase in the money
supply
a) will have no effect on output or the
interest rate.
b) will cause a reduction in the interest
rate.
c) will cause investment to increase.
d) will cause an increase in output and
have no effect on the interest rate.
e) will cause investment to decrease.
10) A reduction in the aggregate price level, P,
will most likely have which of the following
effects?
a) a rightward shift in the IS curve
b) a leftward shift in the IS curve
c) an rightward shift in the LM curve
d) a leftward shift in the LM curve
e) none of the above
11) Which of the following is NOT a
characteristic of bonds?
a) pay zero interest
b) are sold for a price that varies
inversely with the interest rate

ECON 102
SPRING 2007- 1ST MIDTERM
c) cannot be used for transactions
d) all of the above
e) none of the above
12) We know that the amount of money that
individuals want to hold
a) will increase as the interest rate
increases
b) increases as income decreases
c) decreases as the interest rate
increases
d) is independent of income and interest
rate
e) none of the above
13) Which of the following will cause a leftward
shift in the money demand curve?
a) an open market sale of bonds by the
central bank
b) an increase in the interest rate
c) a reduction in income
d) a reduction in the interest rate
e) none of the above
14) Suppose a one-year discount bond offers to
pay $1000 in one year and currently has a
15% interest rate. Given this information, we
know that the bond's price must be:
a) $1150
b) $850
c) $869.56
d) $950
e) none of the above
15) For this question, assume that individuals do
NOT hold currency (i.e., c = 0). If the ratio
of reserves to deposits is 0.20, the money
multiplier is:
a) 0.2
b) 1
c) 5
d) none of the above
e) Given information is not enough
16) Which of the following will cause a
reduction in the money multiplier?
a) a reduction in monetary base
b) an increase in the ratio of reserves
to checkable deposits
c) an increase in monetary base
d) an increase in publics preferences for
checking deposits as opposed to
holding currency
e) none of the above

17) Which of the following events will cause the

interest rate to increase?
a) an increase in income
b) an open market sale of bonds
c) an increase in the reserve deposit ratio
(q)
d) all of the above
e) none of the above
18) We would expect which of the following to
occur when the central bank pursues
expansionary monetary policy?
a) an increase in bond prices and an
increase in the interest rate (i)
b) a reduction in bond prices and an
increase in i
c) an increase in bond prices and a
reduction in i
d) a reduction in bond prices and a
reduction in i
e) none of the above
19) We would expect which of the following to
occur when the central bank conducts an
open market purchase of bonds?
a) an increase in the money multiplier
b) a reduction in the monetary base (H)
c) an increase in H
d) a reduction in the money multiplier
e) both C and D
20) An increase in the reserve ratio, q, will
cause:
a) an increase in the money multiplier
b) an increase in the monetary base (H)
c) a reduction in the money multiplier
d) a reduction in H
e) none of the above
21) Disposable income equals:
a) consumption minus taxes.
b) income minus government spending
c) the sum of consumption and saving
d) income minus both saving and taxes
e) none of the above
22) Suppose the consumption equation is
represented by the following: C = 500 +
0.8YD. Given this information, the marginal
propensity to save is:
a) 0.2
b) 0.8
c) 5
d) Given information is not enough
e) none of the above

ECON 102
SPRING 2007- 1ST MIDTERM
23) We know that a reduction in the desire to
save will cause:
a) a reduction in GDP
b) no change in equilibrium GDP
c) a reduction in the interest rate
d) an increase in equilibrium GDP
e) an increase in the desire to invest.
24) Suppose C = 100 + .8YD. How much of an
increase in government spending must occur
for equilibrium output to increase by 1000?
a) 100
b) 200
c) 500
d) 1000
e) Given information is not enough
25) A reduction in the marginal propensity to
save from 0.4 to 0.3 will cause:
a) the ZZ line to become steeper and a
given change in autonomous
consumption (c0) to have a smaller
effect on output
b) the ZZ line to become steeper and a
given change in autonomous
consumption (c0) to have a larger
effect on output
c) the ZZ line to become flatter and a
given change in autonomous
consumption (c0) to have a larger
effect on output.
d) the ZZ line to become flatter and a
given change in autonomous
consumption (c0) to have a smaller
effect on output
e) none of the above
26) Based on IS-LM model we know that an
increase in taxes will cause:
a) a reduction in investment
b) no change in investment
c) no change in consumption
d) an increase in investment
e) none of the above.
27) During the late 1990s, Japan experienced
reductions in the GDP deflator. Given this
information, we know with certainty that
a) real GDP did not change during these
periods
b) real GDP fell during these periods
c) both real GDP and the overall price
level decreased during these periods
d) the overall price level in Japan
decreased during these periods

e)

Japanese business owners are worse

off

Questions 28-29 are based on the following

information. Robinson Crusoe (RC) and Friday
are the only inhabitants of Dream-Island.
Consider the following series of transactions:
1. Friday catches 250 kg of fish and sells them
to RC for 2000
2. RC uses the fish to make fish oil, which he
sells to Friday for 2500
3. Friday uses the fish oil to make hand lotion,
which he sells for 4500
28) Suppose these are the only transactions in
Dream-Island , and that all of them take
place in the year 2006. GDP in Dream-Island
in 2006 is:
()a
2000
2500
4500
9000
none of the above

29) Alternatively, suppose again that these

transactions are the only ones in DreamIsland, but the first transaction takes place in
2006, while transactions 2 and 3 take place
in 2007. GDP in Dream-Island in 2006 and
2007 respectively is:
a)
b)
c)
d)
e)

2000 and 2500

2000 and 4500
2000 and 7000
0 and 4500
None of the above

30) Suppose again Friday sells 250 kg of fish to

RC in 2006 for 2000 YTL. In 2007 RC
imports some exotic flavors for 250 YTL
from REALDream-Island, a neighboring
island. Using these flavors RC makes a
higher quality fish oil and sells to Friday for
2750 YTL. (in 2007) Using this fish oil
Friday makes hand lotion and sells it to RC
for 4750 YTL. (in 2007). GDP in DreamIsland in 2006 and 2007 respectively is:
a) 2000 and 2500
b) 2000 and 4750
c) 2000 and 2750
d) 0 and 4750
e) None of the above

ECON 102
SPRING 2007- 1ST MIDTERM
Questions 31-34 are based on the following: Consider
a country in which there are just three goods: houses,
cars, and potatoes. The only new, domestically
produced final goods are houses and cars. Potatoes
are imported from a neighbor country. However, all
three goods are consumed by the typical urban
consumer. Listed below are the prices and quantities
of these goods in the base year and in the current year.

Houses
Cars
Potatoes

Price
Quantity
Price
Quantity
Price
Quantity

Base
Year
10
5
5
20
1
100

Current
Year
15
10
5
25
0.75
100

31) According to GDP deflator price level in the

base year was:
a)
b)
c)
d)
e)

0,818
0.928
1
1.076
1.222

33) Real GDP in the current year is

a)
b)
c)
d)
e)

200
225
300
400
none of the above

34) Real GDP growth rate is:

a)
b)
c)
d)
e)

C = 1000 + .6YD
I = 600
G = 2000
T = 1000
35) The equilibrium level of GDP for the above
economy equals:
a)
b)
c)
d)
e)

83%
50%
20%
30%
None of the above

2600
3750
4600
7500
none of the above

36) Suppose taxes decrease by 250 for the above

economy. Given the above information, we
know that equilibrium output will decrease
by:
a) 250
b) 375
c) It will not decrease but increase by
375.
d) It will not decrease but increase by
250.
e) none of the above

0,818
0.928
1
1.076
1.222

32) According to GDP deflator the price level in

the current year is:
a)
b)
c)
d)
e)

Questions 35-36 are based on the following

37) If marginal propensity to consume is 0,6

which one is going to cause the largest
decline in private consumption?
()a
()b
()c
()d
()e

300 YTL decline in I

350 YTL increase in T
300 YTL decline in G
Both (a) and (c)
None of the above

38) If a Turkish citizen buys a television made in

Korea by a Korean firm,
()a
Turkish GDP decreases.
Turkish GDP increases.
Turkish GDP is unaffected.
Turkish GDP deflator rises
None of the above.

39) Employing Figure 1.1, equilibrium output is

____________, and the marginal propensity
to save is ____________.

ECON 102
SPRING 2007- 1ST MIDTERM
a)
b)
c)
d)
e)

200; 0.40
500; 0.40
200; 0.60
500;0.60
None of the above

Figure 1.1

40) A change in the interest rate will generally

affect the
a)
b)
c)
d)
e)

level of investment.
level of consumption.
money supply
All of these.
Both (a) and (b)