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Question 1

Assuming that both the price level and the interest rate are constant, if output were equal to Y´...

a) ...there is an excess supply of goods equal to YY´.

b) ...desired demand (Y´C) is lower than output (Y´B) and inventories of unsold goods will accumulate.

c) ...desired demand (DD´) will shift vertically upward to pass through point B for goods market equilibrium.

d) ...the government budget will be in surplus and equal to BC.

Question 2

Assuming both the price level and the interest rate are constant and government spending increases from G to G´, the government spending multiplier is equal to...

a) ...the difference (Y-Y´)divided by the difference (DD´- DD)

b) ...the length of the segment BA divided by the difference (Y-Y´)

c) ...the difference (Y-Y´) divided by the difference (G´- G)

d) …the slope of IS or IS´

Question 3

The LM curve has a positive slope because...

a) The real money stock falls with increasing Y, and it is the fall in the real money stock that increases i.

b) Investment spending will increase when the interest rate increases.

c) The demand for money increases with the level of real GDP but decreases with nominal interest rates.

d) The quantity of money is worth less at higher levels of output, requiring compensation in the form of higher interest rates.

Question 4

When only such disturbances as changes in technology/tastes or in public spending and taxes can affect economic growth and employment, whereas changes in the money supply would have no effect upon economic growth and employment, we have...

a) ...the Keynesian assumption.

b) ...the classical dichotomy.

c) ...sticky prices.

d) …the Taylor rule.

Question 5

Instead of relying on the price mechanism to match the supply and demand for goods, the Keynesian approach assumes...

a) ...the real money supply adjusts, changing interest rates to bring about the match between output and demand.

b) ...output adjusts to demand.

c) ...exogenous disturbances induce spending multiplier effects.

d) ...collective bargaining adjusts the real wage to bring about full-employment.

Question 6

Monetary policy set according to a Taylor rule under the Keynesian assumption of sticky prices could be characterized as a compromise between the polar cases of (A)________ and (B)____________.

a) (A) a completely flexible interest rate policy; (B) a completely flexible money supply policy

b) (A) a completely flexible interest rate policy; (B) a rule for the money supply to grow at the underlying trend growth rate of output.

c) (A) a constant interest rate policy rule; (B) a completely flexible money supply policy

d) (A) a constant interest rate policy rule; (B) a rule for the money supply to grow at the underlying trend growth rate of output.

Oxford University Press, Online Resource Centre, Chapter 10.