EC 302 Final Exam with Elaborate Questions and Correct Answers

EC 302 Final Exam with Elaborate Questions and Correct Answers 1. Which of the following are characteristic of Friedman's 'Permanent Income Hypothesis'? - ANSWER i) The main influence on long-run consumption is some form of long-run average income ii) Consumption will tend to be a constant proportion of long-run average income (permanent income) 2. Which three of the following are characteristics of Modigliani's 'Life Cycle Hypothesis'? - ANSWER Consumption is seen as a constant proportion of long-run average (lifetime) income 3. If inflation rate in period t is given as 0.02 and consumer price index in period t+1 is 100 then CPI in period t is given by: - ANSWER 98.04 you calcylate this by taking 100 / (1+.02) = 98.04 4. At the optimal level of investment, the - ANSWER marginal benefit of capital = marginal cost of capital 5. At the optimal level of investment, which of the following relation holds - ANSWER P*F'(K)=Pk(R-o) 6. o= symbol with circle and squigle over it 7. If nominal GDP shrinks but real GDP grows, - ANSWER there is deflation 8. According to the Keynesian consumption theory, an artist whose income fluctuates from year to year will: - ANSWER have higher average propensity to consume i years of lower income 9. If the Keynesian consumption function is given by C = 150 + 0.85Y, and Y increases by 1 unit, then savings; - ANSWER increase by 0.15 units calculate this by taking 1 - .85 = .15 10. In Neoclassical theory of investment, the rental firm will optimize at: - ANSWER Pk(r+o)=R o= o with squigle over it 11. Choose one that does not explain consumption behavior of an economic agent: - ANSWER theory of investment 12. Over the business cycle - ANSWER investment is more volatile than consumption 13. Consumption is an example of a ..... variable - ANSWER procyclical variable 14. Relation between real interest rate, nominal interest rate and inflation is given by: - ANSWER i = r + pie 15. In the Modigliani life cycle theory of consumption, if a person receives a temporary bonus - ANSWER she saves it for the most part 16. In the AD-AS model, a decrease in oil prices makes the upward sloping AS curve ________. - ANSWER shift to the right 17. The ________ curve is directly derived from IS-LM model. - ANSWER AD aggregate demand 18. In the short run, given an upward sloping AS curve, an expansionary fiscal policy leads to a ________ increase in 19. the output in the AD-AS model than in the IS-LM model where the price level is fixed, because the price level goes ________ in 20. the AD-AS model. - ANSWER lower ; up 21. When does the Keynesian theory of consumption NOT hold? - ANSWER In the long run 22. Other things being equal, the Neoclassical model of investment predicts that net investment will increase when the: - ANSWER Depreciation rate falls 23. Which of the following is the weighted sum of the prices of a basket of domestically and foreign produced goods? - ANSWER CPI 24. In the ModiglianiLife-Cycle Theory, if the number of years to retirement increases, life resources will____________ 25. and current consumption will ____________. - ANSWER Increase; increase 26. 5. The sum of wages and gross profits is defined as, - ANSWER GDI (gross domestic income) 27. The measure of prices mostly used to announce inflation is the - ANSWER CPI 28. n equilibrium, the real rental price of capital is equal to - ANSWER Marginal Product of Capital 29. The marginal cost of capital is determined by all of the following EXCEPT - ANSWER Corporate Profit Rate 30. The marginal cost of capital is determined by all of the following - ANSWER -Rate of depreciation -interest rate -price of capital and its rate of change 31. When does the Keynesian theory of consumption hold - ANSWER -in cross sections -in cyclical observations 32. Firms find it profitable to add to their capital stock if, - ANSWER marginal product of capital exceeds the real cost of capital