Final Exam – Sample

PART I

1. When measuring the economic growth of an economy, real GDP is more appropriate than
nominal GDP, because
a) The real GDP reflects changes in both the quantity of goods and services and their prices
while the nominal GDP reflects only changes in the quantities.
b) The nominal GDP reflects changes in both the quantity of goods and services and their
prices while the real GDP reflects only changes in the quantities.
c) The nominal GDP is less precise since it does not take into account the depreciation of
capital.
d) The nominal GDP is less precise since it does not take into account the spending of the
public sector.

2. The European Central Bank and the central banks of other developed countries have an
inflation target of:
a) 0%
b) 2%
c) 5%
d) 10%

3. In a given economy, private investment is lower than private saving and, furthermore, there is
a public budget surplus. Which of the following is certain:
a) The financial account is in deficit
b) The financial account is in surplus
c) The financial account is balanced
d) Nothing precise can be said about the balance of the financial account.

4. What is the most appropriate policy to reduce the public budget deficit?
a) An increase in the public sector pensions.
b) A reduction of VAT.
c) An increase in infrastructure public spending.
d) A reduction of public spending on healthcare.

5. The public budget deficit automatically increases in a recession because:

a) Governments automatically increase public expenditure.
b) Transfers to the households are reduced during a recession.
c) The central bank has to increase the reference interest rate.
d) There is a decline in tax revenues.
6. Which of the following measures adopted by a given economy’s central bank would help to
reduce inflation in that economy?
a) Reduce the reserve requirement.
b) Reduce the reference interest rate.
c) An open market operation consisting of selling public debt in the secondary market.
d) Increase the income tax rate.

7. Assume that Fisher’s equation holds and dv=0 (quantity theory of money). In 2014, the real
GDP has increased by 4%, the central bank has increased the money supply by 6%. What is,
approximately, the inflation rate of this economy?
a) 3 %
b) -3 %
c) 2 %
d) -2 %

8. The multiplier effect of public expenditure is larger:

a) The higher the income tax rate.
b) The lower the marginal propensity to consume.
c) The higher the public expenditure.
d) The lower the marginal propensity to save.

9. To find the monetary base (MB), we divide the quantity of money (M) by:
a) the reserve ratio.
b) public spending multiplier.
c) marginal propensity to consume.
d) money multiplier.

10. In the IS-LM model, assume the investment I depends only on the interest rate (i). What is
the effect of an decrease in the money supply by the central bank?
a) An decrease in consumption, investment and public budget deficit.
b) An decrease in consumption and the public budget deficit and an increase in
investment.
c) An decrease in consumption and investment and an increase in the public budget
deficit.
d) An decrease in consumption and an increase in the public budget deficit and
investment.

11. In the AS-AD model, assume the investment I depends only on the interest rate (i). Starting
in a long run equilibrium, what are the effects of an increase in transfers?
a) In the short run, this increases output and the interest rate. In the long run, the price
level is higher relative to its initial level.
b) In the short run, this increases output and the interest rate. In the long run, the price
level and the interest rate are higher relative to initial levels.
 c) In the short run, this increases output and the interest rate. In the long run, the price
level is higher while the interest rate is lower relative to initial levels.
d) In the short run, this increases output and the interest rate. In the long run, the price
level and output are higher while the interest rate is lower relative to initial levels.

12. The labor force is defined as:

a) the total number of individuals who are employed.
b) the sum of the total number of individuals who are employed and the officially
unemployed.
c) the sum of the total number of individuals who are employed, the officially unemployed,
and discouraged workers.
d) the total number of individuals who are 16 years old and older, but not retired.

Use this information to answer the following 3 questions:

A given economy is characterized by the following behavioral functions:
Consumption function: C = 80 + 0.8Yd
Investment function: I = 200 – 20i
Public expenditure: G = 180
Transfers: Tr = 25
Taxes: t = 0.25
Demand for money (in real terms): Md = 0.48Y– 14.4i
Money supply: M = 384
Price level P=1

Use this information to answer the following 3 questions:

13. The short run output (Y) and interest rate (i, expressed as percentage points) are:
a) Y= 950 and i=10
b) Y= 940 and i=9
c) Y=950 and i=5
d) no answer is correct

14. The public budget balance (PBB) is:

a) PBB = 32.5
b) PBB = 12.5
c) PBB = -32.5
d) no answer is correct

15. The government decides to increase public expenditure to G’=340. The new equilibrium income
(Y), and the interest rate (i) are, respectively:
a) Y= 1000, i= 5
b) Y= 1100, i= 5
c) Y= 1100, i= 10
d) no answer is correct

PART II

1. Define money neutrality. Using the AS-AD model, what can you say about money neutrality, based
on the definition you gave before?
Type you answer here (10 lines maximum):

2. What is the unconventional monetary policy? When is it needed and why?

Type you answer here (10 lines maximum):

3. What does it mean to have a Financial Account surplus? What are the benefits of having a
Financial Account surplus? Explain any formula you use to support your answer.
Type you answer here (10 lines maximum):

4. Explain the current covid-19 crisis using the AS-AD and the IS-LM models. In your discussion, refer
to the initial equilibrium as P0, Y0, i0 etc. the short run (SR) equilibrium as P1, Y1, i1 etc. and the
long run (LR) equilibrium as P2, Y2, i2 etc. State which curves shift at each stage and briefly
describe in words what happens with the main macroeconomic variables. State your assumptions
clearly. Note: describe only the negative shock that led to the crisis, not the policy response to this
shock.
Type you answer here (15 lines maximum):

5. What type of fiscal policy could help solve the current crisis? What problems could this policy
generate?
Type you answer here (10 lines maximum):