1. A model in which actions that occur at one time affect what happens at other times is known as
a. a dynamic model.
b. a static model.
c. a general-equilibrium model.
d. a partial–equilibrium model.
2. A model that focuses on what is happening at just one point in time is known as
a. a dynamic model.
b. a static model.
c. a general-equilibrium model.
d. a partial–equilibrium model.
3. A model that is based on the decisions of economic agents is known as
a. a rational-expectations model.
b. a decision-theoretic model.
c. a model with microeconomic foundations.
d. a fully compatible real business cycle model.
4. Which of the following is an advantage of using dynamic models?
a. They help us understand how people form expectations about future economic variables.
b. They help us understand the consumption decision of economic agents at a given point in time.
c. They help us understand the production decisions of firms at a given point in time.
d. They help us understand the movements in the business cycle.
5. In the two-period model, suppose a household’s income in the first period is $40,000, income in the second period is
$50,000, and the real interest rate is 25 percent. What is the maximum amount that the household would be able to
spend in the first period?
a. $40,000
b. $50,000
c. $80,000
d. $100,000
6. In the two-period model, suppose a household’s income in the first period is $30,000, income in the second period is
$60,000, and the real interest rate is 30 percent. What is the household‘s maximum spending in the second period, if it
decides to save the entire amount in the first period?
a. $40,000
b. $50,000
c. $80,000
d. $99,000
7. The amount of goods and services that a household can consume, given its income, is represented by a(n)
a. indifference curve.
b. budget line.
c. demand curve.
d. supply curve.
8. In the two-period model, suppose a household’s income in the first period is $40,000, income in the second period is
$50,000, and the real interest rate is 25 percent. By how much would the household’s maximum spending in the first
period increase if income in the second period increased to 60,000?
a. $6,000
b. $8,000
c. $10,000
d. $12,000
9. In the two-period model, an increase in income in period 1 causes the budget constraint to
a. shift to the left in a parallel fashion.
b. shift to the right in a parallel fashion.
c. rotate in a clockwise direction along the horizontal axis.
d. rotate in a counterclockwise direction along the vertical axis.
10. In the two-period model, a decrease in income in period 2 causes the budget constraint to
a. shift to the left in a parallel fashion.
b. shift to the right in a parallel fashion.
c. rotate in a clockwise direction along the horizontal axis.
d. rotate in a counterclockwise direction along the vertical axis.
11. In the two-period model, an increase in the real interest rate causes the budget constraint to
a. shift to the left in a parallel fashion.
b. shift to the right in a parallel fashion.
c. rotate in a clockwise direction.
d. rotate in a counterclockwise direction.
12. In the two-period model, a decrease in the real interest rate causes the budget constraint to
a. shift to the left in a parallel fashion.
b. shift to the right in a parallel fashion.
c. rotate in a clockwise direction.
d. rotate in a counterclockwise direction.
13. In the two-period model, a lower real interest rate
a. reduces the present value of income.
b. causes the budget constraint to rotate in a clockwise direction.
c. makes households that had initially planned to save better off.
d. makes households that had initially planned to borrow better off.
14. In the two-period model, a higher real interest rate
a. increases the present value of income.
b. causes the budget constraint to rotate in a counterclockwise direction.
c. makes households that had initially planned to save better off.
d. makes households that had initially planned to borrow better off.
15. In the two-period model, suppose a household’s income in the first period is $40,000, income in the second period is
$50,000, and the real interest rate is 25 percent. A sudden shock leads to an increase in the household’s income in
the first period to $45,000 and a decrease in the household’s income in the second period to $43,750. The household
is in the new situation.
a. better off
b. worse off
c. equally well off
d. possibly better off and possibly worse off
16. In the two-period model, suppose a household’s income in period one is $30,000 and its income in period two is
$40,000. Also assume that the household face the real interest rate of 25 percent. What is the present value of the
household’s income?
a. $62,000
b. $46,000
c. $20,000
d. $30,000
17. In a two-period model, a household has an income of $20,000 in period one and an income of $25,000 in period two.
The household faces an interest rate of 50 percent. What is the present value of the household’s income if the
income in period one increases to $30,000?
a. $39,000
b. $46,666.66
c. $40,555.65
d. $50,000
18. Precautionary savings is
a. forced savings, which occurs when the government implicitly saves for people through the Social Security
system.
b. additional savings people make in order to profit from the high returns to the stock market.
c. savings made by the poor.
d. the extra amount of savings a household maintains because of uncertainty about its future income.
19. A situation in which all markets are in equilibrium and all economic agents have made decisions in their own best
interest is called
a. general equilibrium.
b. the liquidity effect.
c. the real wealth effect.
d. dynamic equilibrium.
20. General equilibrium is a situation in which all markets are in
_____.
a. equilibrium; in their own best interests
b. shortage; in their own best interests
c. surplus; based on only partial information
d. equilibrium; based on only partial information
and all economic agents have made decisions
21. An economy has 100 households. The ten rich households each have incomes of $50,000 in period 1 and $75,000 in
period 2. The ninety poor households each have incomes of $20,000 in period 1 and $25,000 in period 2. Assume that
the price of the good is $1 in both periods. Also assume that the households borrow from each other. Suppose that
each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from
both periods. The equilibrium real interest rate is about
a. 20 percent.
b. 30 percent.
c. 40 percent.
d. 50 percent.
22. An economy has 100 households. The forty rich households each have incomes of $50,000 in period 1 and $75,000 in
period 2. The sixty poor households each have incomes of $20,000 in period 1 and $25,000 in period 2. Assume that
the price of the good is $1 in both periods. Also assume that the households borrow from each other. Suppose that
each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from
both periods. The equilibrium real interest rate is about
a. 20 percent.
b. 30 percent.
c. 40 percent.
d. 50 percent.
23. People’s beliefs about future economic variables are known as
a. microeconomic foundations.
b. real interest rates.
c. expectations.
d. permutations.
24. If people form their expectations using all the information available to them, they are said to have
a. informed expectations.
b. rational expectations.
c. irrational forecasts.
d. an information set.
25. Economic research over the last 20 years suggests that expectations are best modeled as variables.
a. dummy
b. ordinal
c. endogenous
d. preference
26. In a two-period model, assume that there are 20 households each with an income of $35,000 in period one and an
income of $45,000 in period two. The equilibrium rate of interest faced by the household is 50 percent. The
government decides to offer each household a tax rebate of $1,500 in period one. As a rational economic agent you
know that the government will tax the households in period two, in order to repay its borrowing. With the interest
rate unaffected by the government’s action, the government will impose a tax of per household, in period two.
a. $2,600
b. $3,265
c. $1,500
d. $2,250
27. In the two-period model, suppose a household’s income in the first period is $40,000, income in the second period is
$50,000, and the real interest rate is 25 percent. The government proposes to give the household a tax rebate of
$5,000 in the first period, but will tax the household an additional $5,000 × 1.25 = $6,250 in the second period. The
household is under the government‘s tax rebate plan compared with before.
a. better off
b. worse off
c. equally well off
d. possibly better off and possibly worse off
28. The view that a change in the timing of taxes does not affect people’s consumption is known as the
a. tax equalization postulate.
b. fiscal policy equality law.
c. Lucas critique.
d. Ricardian equivalence proposition.
29. Under which of the following situations can fiscal policy affect people‘s expectations?
a. If the interest rate on borrowing is higher than the interest rate on lending
b. If the interest rate on lending is more than the interest rate on borrowing
c. If the interest rate on borrowing and lending are the same
d. If the interest rate on lending changes more than a change in the interest rate on borrowing
30. A model that incorporates time and uncertainty in which prices, wages, and interest rates adjust to bring all markets
to equilibrium and which allows economic agents to make decisions in their own interest is known as
a. A dynamic, stochastic, general-equilibrium model
b. A structural macroeconomic model
c. A business-cycle model
d. A statistical model
31. In a real business cycle (RBC) model,
a. agents are heterogeneous.
b. agents do not have rational expectations.
c. economic growth and business cycles are explained by two different variables.
d. shocks to productivity are the sole source of the business cycle.
32. Which of the following is true of real business-cycle models?
a. According to real business-cycle models the demand shocks are responsible for the business cycles.
b. According to real business-cycle models government intervention is responsible for business cycles.
c. According to real business-cycle models fluctuations in total factor productivity are responsible for business
cycles.
d. According to real business-cycle models erratic monetary policies are responsible for business cycles.
33. An RBC researcher who picks a few key parameters based on long-run historical averages of the data is probably
a. calibrating a model.
b. using econometric analysis.
c. replicating a model.
d. solving a model analytically.
34. Because RBC models are complicated, researchers generally
a. solve the models analytically.
b. use econometric analysis on the models.
c. replicate the models.
d. simulate the models.
35. RBC models are said to reproduce some important relationships between variables over the U.S. business cycle.
Identify one such relationship from the given options.
a. Output growth is closely related to growth in investment expenditure over the business cycle.
b. Over the course of the business cycle, consumption spending on physical capital grow less than the investment
spending on physical capital.
c. Over the course of the business cycle, consumption spending on physical capital grow more than the
investment spending on physical capital.
d. Output growth is closely related to growth in labor hours over the business cycle.