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					7Study Guide #6                          The Spending Model                            Name: _______ _____________




___ ___ ___ ___      ___ ___ ___ ___        ___ ___     Graph:_____
 1       3            5       7              9                 11


1. According to the 1994 Economic Report of the President, how would market forces enable a cut in government expenditures to
lead to an increase in investment expenditures?
[A] Through lower interest rates
[B] Through lower taxes
[C] Through government regulation
[D] Through increased taxes
[E] Through increased interest rates

2. A higher interest rate today makes current consumption
[A] just as expensive as future consumption because the return on saving is uncertain.
[B] more expensive relative to future consumption because the return on savings is lowered.
[C] less expensive relative to future consumption because the return on savings is lowered.
[D] less expensive relative to future consumption because the return on savings is increased.
[E] more expensive relative to future consumption because the return on savings is increased.

3. Which of the following statements is true?
[A] The observed relationship between the investment share of GDP and the interest rate is positive, as predicted by theory.
[B] There is no steady relationship between the investment share of GDP and interest rates, contrary to what is predicted by
theory.
[C] The observed relationship between the investment share of GDP and the interest rate is negative, contrary to what is predicted
by theory.
[D] The observed relationship between the investment share of GDP and the interest rate is positive, contrary to what is predicted
by theory.
[E] The observed relationship between the investment share of GDP and the interest rate is negative, as predicted by theory.

4. Suppose the exchange rate in the year 2000 was 1 euro per dollar, and in 2001 the exchange rate increased to 2 euros per
dollar. If the price of a German sweater was 50 euros in both years, the new dollar price in 2001 would be _______ and imports
of German sweaters would __________.
[A] $25; increase
[B] $100; decrease
[C] $25; decrease
[D] $100; increase
[E] $50; remain constant

5. An increase in the interest rate
[A] causes the nongovernment share of GDP line to shift to the left.
[B] causes an upward movement along the nongovernment share line.
[C] causes a downward movement along the nongovernment share line.
[D] causes the nongovernment share of GDP line to shift to the right.
[E] has an indeterminate effect on nongovernment expenditures since some nongovernment expenditures are positively related to
the interest rate while others exhibit a negative relationship.

6. If the nongovernment share of GDP shifts to the right, and the government share of GDP remains constant, then
[A] the dollar exchange rate must weaken.
[B] there must be a decrease in taxes.
[C] the interest rate decreases.
[D] there must be an increase in taxes.
[E] the interest rate increases.
7Study Guide #6                            The Spending Model                             Name: _______ _____________



7. A decrease in the share of government purchases will _________ the share of GDP available for nongovernment purchases and
__________ the interest rate in the long run.
[A] decrease; increase
[B] increase; increase
[C] decrease; decrease
[D] increase; decrease
[E] increase; have no effect on

8. Which of the following situations would best explain why the real long-term interest rate would increase?
[A] An increase in imports
[B] A decrease in the government share of GDP
[C] A decrease in the investment share of GDP
[D] An increase in the consumption share of GDP
[E] A decrease in exports

9. Which of the following equations is correct?
    S I X
[A]    
    Y Y Y

      S       C       X
[B]              
      Y       Y       Y

      S       C       X
[C]              
      Y       Y       Y

      S       C       G
[D]              
      Y       Y       Y

      S       C       I
[E]              
      Y       Y       Y

10. To determine the long-run interest rate, you can use either the four-diagram approach or the saving-investment approach.
[A] True
[B] False

11. Suppose, for reasons associated with political stability, international investors decide to increase their demand for dollars.
Show what will happen to the net export share of GDP. i.e., Draw the graph

				
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