I) Multiple Choice Questions (10 points)

1) Money’s most important function is as

(a) the standard for credit transactions.
(b) the medium of exchange.
(c) a store of value.
(d) a unit of account.

2) I am saving money to buy a new car. Money is functioning as a

(a) medium of exchange.
(b) store of value.
(c) unit of account.
(d) standard of deferred payment.

Use the following balance sheet for First Union National Bank to answer the next three
questions. First Union has a required reserve ratio of 10%.

Assets Liabilities
Reserves $2,500,000 Checking deposits 6,000,000
Loans outstanding 5,500,000
Other assets 1,000,000 Net Worth 3,000,000
Total $9,000,000 Total $9,000,000

3) First Union has $2,500,000 in reserves, checking deposits of $6,000,000, and a

required reserve ratio of 10%. First Union has of required reserves and of
excess reserves.
(a) $600,000; $1,900,000
(b) $500,000; $5,500,000
(c) $1,200,000; $1,300,000
(d) $1,200,000; $4,800,000
4) Assuming prudent management, First Union can increase its loans by up to
(a) $1,300,000.
(b) $1,500,000.
(c) $1,900,000.
(d) $3,000,000.

5) Assuming all banks have a reserve ratio of 10%, and that the other banks were loaned
up initially, the nation’s money supply could expand by
(a) $1,300,000.
(b) $6,500,000.
(c) $12,500,000.
(d) $19,000,000.

6) If the consumption function is of the form C = 80 + 0.4Y, the MPS equals

(a) -0.4.
(b) 0.4.
(c) 0.6.
(d) -0.6.

7) Assume that there is no government, If the saving function is of the form

S = -20 + 0.3Y, consumption at an income level of 200 is
A) 80.
B) 120.
C) 160.
D) 180.

8) In a closed economy with no government, aggregate expenditure is

A) consumption plus investment.
B) saving plus investment.
C) consumption plus the MPC.
D) MPC + MPS.

9) If the MPS is 0.60, MPC

A) is 0.4.
B) is 0.30.
C) is 1.6.
D) cannot be determined by the given information.

10) If consumption is $30,000 when income is $35,000, and consumption

increases to $36,000 when income increases to $43,000, the MPC is
A) 0.65.
B) 0.80.
C) 0.75.
D) 0.95.

11) Which of the following is an investment?

A) the purchase of a new printing press by a business
B) the purchase of a corporate bond by a household
C) the purchase of a share of stock by a household
D) a leveraged buyout of one corporation by another

12) Assume that in Scandia, planned investment is $80 billion but actual
investment is $60 billion.
Unplanned inventory investment is
A) -$10 billion.
B) $140 billion.
C) -$20 billion.
D) $70 billion

13) You are giving money to the cashier in the supermarket to buy some items. You are
using money in its role as a
(a) medium of exchange.
(b) store of value.
(c) unit of account.
(d) mean of payment.

14) Each of the following is an example of commodity money EXCEPT.

(a) Gold.
(b) Rice.
(c) Cigarettes.
(d) Lebanese Lira.

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Refer to the information provided in Table 8.3 below to answer the questions
that follow. (Assume that there is no government)
Table 8.3

15) Refer to Table 8.3. At an aggregate output level of $400 billion, planned
expenditure equals
A) $550 billion.
B) $450 billion.
C) $500 billion.
D) $850 billion.

16) Refer to Table 8.3. At an aggregate output level of $800 billion, aggregate
saving
A) equals -$50 billion.
B) equals $0.
C) equals $50 billion.
D) cannot be determined from this information.

17) Refer to Table 8.3. At an aggregate output level of $200 billion, the unplanned
inventory change is
A) -$150 billion.
B) -$200 billion.
C) -$50 billion.
D) $100 billion.

18) Refer to Table 8.3. At an aggregate output level of $600 billion, the unplanned
inventory change is
A) -$100 billion.
B) -$50 billion.
C) $0.
D) $50 billion.

19) Refer to Table 8.3. The equilibrium level of aggregate output equals
A) $400 billion.
B) $600 billion.
C) $800 billion.
D) $1,000 billion.

20) Refer to Table 8.3. Planned saving equals planned investment at an aggregate
output level
A) of $1000 billion.
B) of $600 billion.
C) of $800 billion.
D) that cannot be determined from this information.
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Exercise 2 (2 points)
(a) If tax multiplier is equal -1. Calculate MPS and MPC

Mt=-MPC/1-MPC
MPC=0,5
MPS=0,5

(b) If tax multiplier is equal -1. Calculate government spending multiplier

MG+MT=1 accordingly MG=2

Or
MG=1/MPS=1/0,5=2

(c) If tax multiplier is equal -1. When taxes increase by 200,000,000$ what will be
the impact of this intervention on equilibrium output (Y)?

MT=DY/DT=-1
Accordingly is taxes increase by 200,000,000$ Y will decrease by 200,000,000$

Exercise 2 (8 points)
Fill in the blanks in the table. (1point)

Y T Yd C S I G AE
0 20 –20 40 –60 30 10 80
100 20 80 120 –40 30 10 160
200 20 180 200 –20 30 10 240
300 20 280 280 0 30 10 320
400 20 380 360 20 30 10 400

a) Calculate MPC and MPS. (1 point)

MPC = 0.8; MPS = 0.2

b) Calculate tax multiplier and government spending multiplier. (1 point)

the government spending multiplier is 1/MPS = 5; the tax multiplier is –
MPC/MPS = –4.

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c) What is the equilibrium income level? (0,5 point)

Equilibrium occurs at 400, where S + T = I + G.

d) When the economy reaches its final equilibrium, what is the amount of
government surplus or deficit? (1 point)

T-G=20-10=10 Surplus

d) The government wants to increase output by 200. What fiscal policies could
the government use? Calculate the intervention in each case. (1,5 points)

ΔY=+200
The government can use the tool of taxation to increase Y.
Mt=-4; ΔY/ ΔT=-4. 200/ ΔT=-4 ; ΔT=-50
The government can decrease taxes by 50 to increase Y by 200.

The government can use the tool of government spending to increase

Y.
Mg=5; ΔY/ ΔT=5. 200/ ΔT=5 ; ΔG=40
The government can increase government spending by 40 to increase
Y by 200.

The government can also use the balanced budget tool: it can increase
taxes by 200 and increase government spending by 200 this will also
lead to an increase in Y: 200

e) if the government increases G by 50 and increases T by 50 simultaneously.

Calculate the impact of these interventions on Y, G, T, C and S. (2 points)

Y increases by 50
G increase by 50
T increase by 50
C increases by 50*MPC=50*0.8=40
S increases by 50*MPS=50*0.2=10