Question No.

1 5 are based on the following information from the national income accounts
(in $) for a hypothetical economy
GDP
Gross Investment
Net Investment
Consumption
Government Purchases of Goods and
Services
Government Budget Surplus

6000
800
200
4000
1100
30

1.
(a)
(b)
(c)
(d)
2.
(a)
(b)
(c)
(d)
3.
(a)
(b)
(c)
(d)
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
(c)
(d)

NDP is
5400
5300
5900
None of the above
Net Export is
100
70
130
700
Government Tax is
1130
1080
300
None of the above
Private Savings
2000
900
870
1970
National Savings
2000
900
870
1970

6.
(a)
(b)
(c)
(d)

A decrease in the money supply will shift the IS curve

To the right
To the left
Only slope will be changed, No shift in the IS Curve
None of the above

7.
(a)
(b)
(c)
(d)

A decrease in the tax rate will shift the LM curve

To the right
To the left
Only slope will be changed, No Shift in the LM Curve
None of the above

Question No. 8 and 9 are based on the following specification

The following equations describe an economy. (Think of C,I,G, etc. as being measured in
billions and r as a percentage; a 5 percent interest rate implies r =5)
C = 0.8(1-t)Y, t= 0.25, I = 900-50r, G = 800
L = 0.25Y - 62.5r,

/ P
M

= 500

8.
(a)
(b)
(c)
(d)

What is the equilibrium level of income

3500
46736.25
6500
None of the above

9.
(a)
(b)
(c)
(d)

What is the equilibrium level of interest rate?

11.33
6
18
None of the above

10. In IS- LM model the effectiveness of expansionary fiscal policy

(a) Increases with the increase in the interest sensitivity of money demand
(b) Decreases with the increase in the interest sensitivity of money demand
(c) is maximum if money demand function is perfectly interest elastic
(d) Both (a) and (c)
11. In IS- LM model the effectiveness of expansionary monetary policy
(a) Increases with the increase in the interest sensitivity of money demand
(b) Decreases with the increase in the interest sensitivity of money demand
(c) is maximum if money demand function is perfectly interest elastic
(d) Both (a) and (c)

12. In IS- LM model the effectiveness of expansionary monetary policy

(a) Increases if the investment demand is more interest sensitive
(b) Increases if the investment demand is less interest sensitive
(c) Not changes with the interest sensitivity of investment demand
(d) None of the above
13. In IS- LM model the effectiveness of expansionary fiscal policy
(a) Increases if the investment demand is more interest sensitive
(b) Increases if the investment demand is less interest sensitive
(c) Not changes with the interest sensitivity of investment demand
(d) None of the above
14. In IS LM model with the increase in G
(a) Interest rates increases less if the investment demand is more interest sensitive

(b) Interest rates increases more if the investment demand is more interest sensitive
(c) Interest rates increases less if the investment demand is less interest sensitive
(d) Both (b) and (c)
15. Impact of fiscal policy will be greater if
(a) Money supply is a positive function of rate of interest
(b) Money supply is a negative function of rate of interest
(c) Not dependent on functional form of money supply
(d) None of the above
16. The crowding-out effect implies that an increase in G (holding taxes constant) would
lead to all of the following EXCEPT:
a)
b)
c)
d)

A decrease (leftward shift) in money demand.

An increase in the real rate of interest.
A decrease in investment spending.
An offset to the initial increase in aggregate demand.

17. Other things being equal, a reduction in the money supply will lead to a
a.
b.
c.
d.

Rise in the rate of interest and no change in investment expenditure

Fall in the rate of interest and an increase in investment expenditure
Rise in the rate of interest and a decrease in investment expenditure
Rise in the rate of interest and in increase in investment expenditure