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Econ 402 Final Exam Practice problems || A+ Verified Solutions.
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  • Econ 402
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  • Econ 402

Other things equal, if planned investment spending is greater than actual investment spending, then aggregate expenditure will be ________ real GDP and inventories will ________. A. greater than; rise B. less than; fall C. greater than; fall D. less than; rise correct answers C If the ...

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  • August 16, 2024
  • 123
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • other things equal if planned investment spending

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  • Econ 402
  • Econ 402

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Econ 402 Final Exam Practice problems || A+ Verified
Solutions.
Other things equal, if planned investment spending is greater than actual investment spending,
then aggregate expenditure will be ________ real GDP and inventories will ________.

A.
greater than; rise
B.
less than; fall
C.
greater than; fall
D.
less than; rise correct answers C

If the level of real GDP is initially
Y2,
spending is ________ production and there is an unexpected ________ in inventories.
A.
greater than; increase
B.
less than; increase
C.
less than; decrease
D.
greater than; decrease correct answers B

If the MPC = 0.8, an increase in investment spending from $35 billion to $38 billion will
increase real GDP by
A.
$3 billion.
B.
$3.75 billion.
C.
$15 billion.
D.
$24 billion correct answers C

Assume the economy is initially at equilibrium at potential GDP of $250 billion. If the MPC =
0.50 and the difference between AE1 and AE2 represents a $75 billion decrease in planned
investment spending, real GDP at Y2 will be equal to
A.
$100 billion.
B.
$125 billion.

,C.
$175 billion.
D.
$212.5 billion. correct answers A.

If the MPC = 0.80, the tax multiplier is
A.
−2.
B.
−4.
C.
−5.
D.
−8. correct answers B.

Other things equal, when the real interest rate rises,
C,
I and NX ________ and real GDP will ________ relative to potential GDP.
A.
increase; increase
B.
decrease; increase
C.
decrease; decrease
D.
increase; decrease correct answers C

Which of the following equations best represents the long-term real interest rate? The long-term
real interest rate =
A.
the long-term nominal interest rate + the term structure effect + the default-risk premium − the
expected rate of inflation
B.
the short-term nominal interest rate + the term structure effect + the default-risk premium − the
expected rate of inflation
C.
the short-term nominal interest rate − the term structure effect − the default-risk premium + the
expected rate of inflation
D.
the short-term real interest rate + the term structure effect + the default-risk premium + the
expected rate of inflation correct answers B

If the long−term real interest rate is 5.1%, the term structure effect is 2.0%, the default−risk
premium is 1.7%, and the expected rate of inflation is 3.3%, the short−term nominal interest rate
will be
A.

,−1.9%.
B.
4.7%.
C.
5.5%.
D.
12.1%. correct answers B

Suppose the economy's equilibrium starts out with an output gap of Y1, and real GDP increases
so the output gap increases to Y2. If the Fed keeps the money supply constant, money demand
will ________ and the nominal interest rate will ________.
A.
remain constant; remain constant
B.
increase; remain constant
C.
increase; decrease
D.
increase; increase correct answers D

A shift from MP1 to MP2 will occur if
A.
the term structure effect increases.
B.
the default−risk premium decreases.
C.
the Fed decreases its target for the short−term nominal interest rate.
D.
the expected inflation rate increases. correct answers A

A shift from MP1 to MP3 will occur if
A.
the Fed increases its target for the short−term nominal interest rate.
B.
investors increase the short−term interest they expect in the future.
C.
the default−risk premium decreases.
Your answer is correct.
D.
the term structure effect increases correct answers C

Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the
economy experiences a ________ demand shock and the Fed does not change its target
short−term nominal interest rate, the IS curve shifts to the left and real GDP will be ________
potential GDP.
A.

, positive; less than
B.
negative; greater than
C.
negative; less than
D.
positive; greater than correct answers c

Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the
economy experiences a positive demand shock, increasing consumer optimism, and the Fed does
not change its target short−term nominal interest rate, the ________ shifts to the right and the
output gap will be ________.
A.
MP curve; negative
B.
MP curve; positive
C.
IS curve; negative
D.
IS curve; positive correct answers

Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the
economy experiences a positive demand shock, increasing consumer optimism, and the Fed does
not change its target
short−term
nominal interest rate, the ________ shifts to the right and the output gap will be ________.
A.
MP curve; negative
B.
MP curve; positive
C.
IS curve; negative
D.
IS curve; positive correct answers D

A movement from point A to point B could be caused by
A.
a negative demand shock.
B.
an increase in the expected rate of inflation.
C.
an increase in the default−risk premium.
This is the correct answer.
D.
a decrease in the term premium investors expect in the future. correct answers C

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