EC 302 Final Exam Questions With
Correct Answers 2026
If the Keynesian consumption function is given by C = 150 + 0.60Y, and Y increases by
1 unit, then savings - ANSWER-Increases by 0.40 unit
If a pizza Econland has a population of 60 people with 40 of them working producing a
total output of $600,000. The standard of living of Econland equals ________ while
average labor productivity equals ________. - ANSWER-10000, 15000
Standard of Living: Total Output / Population
Average Labor Productivity: Total Output / Population of Workers
If nominal GDP is $15 trillion and real GDP is $12 trillion, then GDP deflator is given by:
- ANSWER-125, and this indicates that the price level has increased 25% since the
base year
GDP Deflator: Nominal / Real *100
Michigan began indexing its minimum wage to inflation in 2010. Consequently, when
the inflation rate is 5%, minimum wage earners in Michigan who are able to stay
employed can expect ____________________________. - ANSWER-A nominal wage
increase of 5%
Suppose that the base year for CPI is 2014. The cost of the CPI basket in 2014 is $50;
the cost of the basket in 2015 was $60, and the cost of the basket in 2016 was $66.
What was the CPI in 2015? - ANSWER-CPI Basket 2014=50$
CPI Basket 2015=60$
So, 60/50*100 (Take year you want and divide by base year)
=120
According to the quantity theory of money, what is the effect of an increase in the
quantity of money? - ANSWER-An increase in the price level
Quantity theory of money is given by M V = P Y , here we assume that V and Y are
constant, hence as M ↑ =⇒ P ↑
An increase in the sensitivity of money demand to the interest rate: - ANSWER-Makes
LM curve flatter.
, - The LM equation is given by : M P = kY −hi, where h is the sensitivity of money
demand to interest rate. Hence the equation can be rewritten as i = kY/ h − M/P *1/ h ,
so as h increases when all other remaining constant then k/h decreases, hence slope
becomes flatter.
An increase in the marginal propensity to consume will: - ANSWER-Lead to the
consumption function becoming steeper
Which of the following are characteristic of Friedman's 'Permanent Income Hypothesis'?
- ANSWER-- The main influence on long-run consumption is some form of long-run
average income
- Consumption will tend to be a constant proportion of long-run average income
(permanent income)
Inflation/CPI Equation - ANSWER-Infaltion t= (CPI t+1 - CPI t)
/CPI t
At the optimal level of investment, which of the following relation holds: - ANSWER-
P*F(K) = PK(r+d)
Marginal benefit of capital = Marginal cost of capital
In the Modigliani Life-Cycle Theory, if the number of years to retirement decreases, life
resources will ________ and current consumption will ___________ - ANSWER-
decrease, decrease
Which of the following are characteristic of Keynesian theory of money? - ANSWER-
Money can be used for transaction, speculative and precautionary purpose under
Keynesian theory.
Money demand is elastic with respect to interest rate
Suppose the following changes happen in the IS-LM model;
I. Government increases taxes.
II. Central bank decreases money supply.
III. Exogenous consumption, C0, is increased.
Which of the following statements is true? - ANSWER-If II and III happen, then the
equilibrium interest rate will definitely increase.
- A decrease in money supply shifts the LM curve to the left
Hence increasing interest rates whereas increase in C0 will shift the IS curve to the
right, raising interest rate.
Hence when both happens then interest rate will increase for sure.
Correct Answers 2026
If the Keynesian consumption function is given by C = 150 + 0.60Y, and Y increases by
1 unit, then savings - ANSWER-Increases by 0.40 unit
If a pizza Econland has a population of 60 people with 40 of them working producing a
total output of $600,000. The standard of living of Econland equals ________ while
average labor productivity equals ________. - ANSWER-10000, 15000
Standard of Living: Total Output / Population
Average Labor Productivity: Total Output / Population of Workers
If nominal GDP is $15 trillion and real GDP is $12 trillion, then GDP deflator is given by:
- ANSWER-125, and this indicates that the price level has increased 25% since the
base year
GDP Deflator: Nominal / Real *100
Michigan began indexing its minimum wage to inflation in 2010. Consequently, when
the inflation rate is 5%, minimum wage earners in Michigan who are able to stay
employed can expect ____________________________. - ANSWER-A nominal wage
increase of 5%
Suppose that the base year for CPI is 2014. The cost of the CPI basket in 2014 is $50;
the cost of the basket in 2015 was $60, and the cost of the basket in 2016 was $66.
What was the CPI in 2015? - ANSWER-CPI Basket 2014=50$
CPI Basket 2015=60$
So, 60/50*100 (Take year you want and divide by base year)
=120
According to the quantity theory of money, what is the effect of an increase in the
quantity of money? - ANSWER-An increase in the price level
Quantity theory of money is given by M V = P Y , here we assume that V and Y are
constant, hence as M ↑ =⇒ P ↑
An increase in the sensitivity of money demand to the interest rate: - ANSWER-Makes
LM curve flatter.
, - The LM equation is given by : M P = kY −hi, where h is the sensitivity of money
demand to interest rate. Hence the equation can be rewritten as i = kY/ h − M/P *1/ h ,
so as h increases when all other remaining constant then k/h decreases, hence slope
becomes flatter.
An increase in the marginal propensity to consume will: - ANSWER-Lead to the
consumption function becoming steeper
Which of the following are characteristic of Friedman's 'Permanent Income Hypothesis'?
- ANSWER-- The main influence on long-run consumption is some form of long-run
average income
- Consumption will tend to be a constant proportion of long-run average income
(permanent income)
Inflation/CPI Equation - ANSWER-Infaltion t= (CPI t+1 - CPI t)
/CPI t
At the optimal level of investment, which of the following relation holds: - ANSWER-
P*F(K) = PK(r+d)
Marginal benefit of capital = Marginal cost of capital
In the Modigliani Life-Cycle Theory, if the number of years to retirement decreases, life
resources will ________ and current consumption will ___________ - ANSWER-
decrease, decrease
Which of the following are characteristic of Keynesian theory of money? - ANSWER-
Money can be used for transaction, speculative and precautionary purpose under
Keynesian theory.
Money demand is elastic with respect to interest rate
Suppose the following changes happen in the IS-LM model;
I. Government increases taxes.
II. Central bank decreases money supply.
III. Exogenous consumption, C0, is increased.
Which of the following statements is true? - ANSWER-If II and III happen, then the
equilibrium interest rate will definitely increase.
- A decrease in money supply shifts the LM curve to the left
Hence increasing interest rates whereas increase in C0 will shift the IS curve to the
right, raising interest rate.
Hence when both happens then interest rate will increase for sure.
