Macroeconomics Final Exam Practice Problems: Government


Macroeconomics Final Exam Practice Problems: Government

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Macroeconomics Final Exam Practice Problems: Government

 

(The attached PDF file has better formatting.)

 

*Question 1.1: Permanent Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government permanently raises spending to $600 billion to finance national health insurance, which of the following is true?

 

 

Private Consumption

Private Investment

Interest Rates

A

rise

rise

fall

B

fall

fall

rise

C

no change

fall

rise

D

fall

no change

no change

E

rise

rise

no change

 

 

Answer 1.1: D

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 

 

*Question 1.2: Permanent Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government permanently raises spending to $600 billion to finance national health insurance, which of the following is true?

 

 

Real GDP

Private Consumption

Private Investment

Interest Rates

A

fall

rise

rise

fall

B

rise

fall

fall

rise

C

fall

no change

fall

rise

D

no change

fall

no change

no change

E

rise

rise

rise

no change

 

 

Answer 1.2: D

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 

*Question 1.3: Cyclicality

 

The correlation of consumption, investment, and government expenditures with real GDP affects our interpretation of business cycles.

 

           Pro-cyclical   a correlation significantly greater than zero.

           Counter-cyclical   a correlation significantly less than zero.

           Independent   a correlation not significantly different from zero.

 

 

What is the correlation of private consumption, gross domestic investment, and permanent (non-wartime) government expenditures with real GDP?

 

 

Private Consumption

Gross Domestic Investment

Permanent Government Expenditures

A

pro-cyclical

pro-cyclical

counter-cyclical

B

counter-cyclical

counter-cyclical

pro-cyclical

C

independent

counter-cyclical

pro-cyclical

D

counter-cyclical

independent

independent

E

pro-cyclical

pro-cyclical

independent

 

 

Answer 1.3: E

 

 

 

 

*Question 1.4: Temporary Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government temporarily raises its consumption to $600 billion to finance a short-term war, which of the following is true?

 

 

Private Consumption

Private Investment

Interest Rates

A

rise slightly

rise

fall

B

fall slightly

fall

rise

C

rise slightly

fall

rise

D

fall slightly

rise

fall

E

rise slightly

rise

no change

 

 

Answer 1.4: B

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 


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NEAS - 6/19/2010 11:52:50 AM

Macroeconomics Final Exam Practice Problems: Government

 

(The attached PDF file has better formatting.)

 

*Question 1.1: Permanent Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government permanently raises spending to $600 billion to finance national health insurance, which of the following is true?

 

 

Private Consumption

Private Investment

Interest Rates

A

rise

rise

fall

B

fall

fall

rise

C

no change

fall

rise

D

fall

no change

no change

E

rise

rise

no change

 

 

Answer 1.1: D

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 

 

*Question 1.2: Permanent Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government permanently raises spending to $600 billion to finance national health insurance, which of the following is true?

 

 

Real GDP

Private Consumption

Private Investment

Interest Rates

A

fall

rise

rise

fall

B

rise

fall

fall

rise

C

fall

no change

fall

rise

D

no change

fall

no change

no change

E

rise

rise

rise

no change

 

 

Answer 1.2: D

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 

*Question 1.3: Cyclicality

 

The correlation of consumption, investment, and government expenditures with real GDP affects our interpretation of business cycles.

 

           Pro-cyclical   a correlation significantly greater than zero.

           Counter-cyclical   a correlation significantly less than zero.

           Independent   a correlation not significantly different from zero.

 

 

What is the correlation of private consumption, gross domestic investment, and permanent (non-wartime) government expenditures with real GDP?

 

 

Private Consumption

Gross Domestic Investment

Permanent Government Expenditures

A

pro-cyclical

pro-cyclical

counter-cyclical

B

counter-cyclical

counter-cyclical

pro-cyclical

C

independent

counter-cyclical

pro-cyclical

D

counter-cyclical

independent

independent

E

pro-cyclical

pro-cyclical

independent

 

 

Answer 1.3: E

 

 

 

 

*Question 1.4: Temporary Increase in Government Expenditures

 

Government spending may affect private consumption, investment, and interest rates.

 

Suppose government spending is now $500 billion.  If the government temporarily raises its consumption to $600 billion to finance a short-term war, which of the following is true?

 

 

Private Consumption

Private Investment

Interest Rates

A

rise slightly

rise

fall

B

fall slightly

fall

rise

C

rise slightly

fall

rise

D

fall slightly

rise

fall

E

rise slightly

rise

no change

 

 

Answer 1.4: B

 

Increased government spending makes it harder for private firms to borrow and causes people to consume and invest less.

 

If the government finances its spending with debt, interest rates rise, and private firms invest less.  Consumers expect to pay higher taxes in later years, so they spend less.

 

If the government finances its spending with higher taxes, consumers spend less and save less. Interest rates rise, and private firms invest less.

 

 

 


 

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