Answer key to sample mc questions for final exam

Here is the key. A few warrant some commentary to clear up any potential confusion.

1-D, 2-D, 3-B, 4-A, 5-A, 6-A*,
7-B, 8-D, 9-C, 10-B, 11-D, 12-C, 13-C, 14-A,
15-A, 16-C, 17-B, 18-D,
19-D, 20-C, 21-A, 22-B, 23-D,
24-C**, 25-B,
26-A, 27-D, 28-C, 29-D, 30-A, 31-E***, 32-D, 33-D,
34-C, 35-D, 36-B, 37-A***, 38-C, 39-B, 40-C,
41-C, 42-D, 43-B, 44-A, 45-C,
46-D, 47-B, 48-C, 49-B, 50-B, 51-A, 52-B,
53-D, 54-C, 55-D, 56-C, 57-D, 58-A, 59-C.


*X is exports. This is notation from the Krugman test bank.
**Problem 24 is consistent with the text but inconsistent with what I said in class. (Can we both be right? Yes.) According to this problem and the argument in Krugman, a government's budget deficit increases demand for loanable funds, thereby driving up interest rates. Note in this problem Investment will fall from 60 billion to 40 billion (total supply of loanable funds is 80 billion, indeed, but of this 80 billion, 40 of it goes to the government's deficit and 40 is left for investment--this is when the interest rate is 8%). In class, I argued that government borrowing would reduce savings, shifting the supply of loanable funds to the right. This way of thinking is consistent with the equation of national savings. If the deficit increases, government (a.k.a public) savings is smaller, therefore national savings is smaller. This shifts savings supply to the left, interest rates rise, and investment falls to 40 billion. Honestly, I think Krugman and Wells are not consistent in the way they describe savings from the national income accounting method and the loanable funds method. I'd like to think my way is more consistent. Yet, we are both right.

*** I think A, B, and D all shift AD to the left. C will move the economy down along the existing AD curve. I believe there is no correct answer here. Hence we'll let "E. none of the above" be the correct choice.

**** AD increases, ASsr increases. When shifting both, it is clear Y increases but P could rise or fall.