The index of leading indicators compiled by the Conference Board includes 10 data
series that are used to forecast economic activity about ______ in advance.
A) one month
B) six to nine months
C) one to two years
D) five to ten years
The Solow model shows that a key determinant of the steady-state ratio of capital to
labor is the:
A) level of output.
B) labor force.
C) saving rate.
D) capital elasticity in the production function.
According to the neoclassical theory of distribution, in an economy described by a
Cobb”Douglas production function, workers should experience high rates of real wage
growth when:
A) real interest rates are high.
B) real interest rates are low.
C) average labor productivity is growing rapidly.
D) capital’s share of income is growing rapidly.
Consumption is said to follow a random walk if:
A) consumers have rational expectations.
B) consumption is proportional to permanent income.
C) changes in consumption are unpredictable.
D) changes in consumption produce secular stagnation.
Making use of Okun’s law, it may be computed that if the Fed reduces the money
supply 5 percent and the quantity theory of money is true, then the unemployment rate
will rise about:
A) 5 percent in both the short run and the long run.
B) 2.5 percent in both the short run and the long run.
C) 5 percent in the short run but will return to its natural rate in the long run.
D) 2.5 percent in the short run but will return to its natural rate in the long run.
Exhibit: Risk Premium
A small open economy with a floating exchange rate is initially in equilibrium at A with
If the establishment of a new government in the country decreases the risk
premium, then will shift to _____ and will shift to _____.
A)
B)
C)
D)
The short-run equilibrium in the dynamic model of aggregate demand and aggregate
supply is determined by the intersection of the:
A) DADt and DASt ” 1
B) DADt and DASt
C) Yt and DASt
D) DADt ” 1 and Yt
Examination of recent data for many countries shows that countries with high saving
rates generally have high levels of output per person because:
A) high saving rates mean permanently higher growth rates of output.
B) high saving rates lead to high levels of capital per worker.
C) countries with high levels of output per worker can afford to save a lot.
D) countries with large amounts of natural resources have both high output levels and
high saving rates.
In the national income accounts, consumption expenditures include all of the following
except household purchases of:
A) durable goods.
B) nondurable goods.
C) new residential housing.
D) services.
The statistical relationship between changes in real GDP and changes in the
unemployment rate is called:
A) the Phillips curve.
B) the Solow residual.
C) the Fisher effect.
D) Okun’s law.
Paying efficiency wages helps firms reduce the problem of adverse selection by:
A) generating additional profits that can be used to pay for more proficient hiring
managers.
B) keeping labor unions from organizing workers in the firm.
C) encouraging unsupervised workers to maintain a high level of productivity.
D) providing an incentive for the best-qualified workers to remain with the firm.
Institutions that stand between savers and investors, helping to direct financial
resources to their best use are called:
A) financial markets.
B) financial intermediaries.
C) financial regulators.
D) financial capitalists.
If a country chooses to restrict international capital flows and to maintain a fixed
exchange rate, then it must:
A) live with exchange-rate volatility.
B) control its citizens’ access to world financial markets.
C) give up the use of monetary policy for purposes of domestic stabilization.
D) give up the use of fiscal policy for purposes of domestic stabilization.
The IS curve shows combinations of ______ that are consistent with equilibrium in the
market for goods and services.
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances
Alan Blinder’s survey of firms found that the theory of price stickiness accepted by the
most firms was:
A) menu costs.
B) coordination failure.
C) nominal contracts.
D) procyclical elasticity.
Based on the Solow growth model with population growth and labor-augmenting
technological progress, explain how each of the following policies would affect the
steady-state level and steady-state growth rate of total output per person:
a. a reduction in the government’s budget deficit
b. grants to support research and development
c. tax incentives to increase private saving
d. greater protection of private property rights
In a steady state with population growth and technological progress:
A) the real rental price of capital is constant and the real wage grows at the rate of
technological progress.
B) the real rental price of capital grows at the rate of technological progress and the real
wage is constant.
C) both the real rental price of capital and the real wage grow at the rate of
technological progress.
D) both the real rental price of capital and the real wage are constant.
Assume that a firm is considering building a factory that will cost $5 million. It believes
that it can get a profit from this factory of $600,000 per year for many years. The
interest rate at which the firm can borrow money is 15 percent. After evaluating
whether it should build the factory, the firm decides that it should:
A) not build because the rate of return on the factory is only 6 percent.
B) not build because the rate of return on the factory is only 12 percent.
C) build because the rate of return on the factory is 30 percent.
D) build because the rate of return on the factory is 35 percent.
An asset-price bubble bursts if there is:
A) a panic cycle of asset sales and falling asset prices.
B) a statement from the central bank stating that the bubble is over.
C) an excess demand for an asset that raises asset prices.
D) a sharp decrease in interest rates that pricks the asset-price bubble.
Looking at the aggregate demand curve alone, one can tell ______ that will prevail in
the economy.
A) the quantity of output and the price level
B) the quantity of output
C) the price level
D) neither the quantity of output nor the price level
If the short-run aggregate supply curve is assumed to be horizontal and there are no
international capital flows, then the mother of all models in the Appendix to Chapter 14
corresponds to which of the following special cases?
A) classical closed economy
B) aggregate demand and aggregate supply
C) IS“LM model
D) Mundell”Fleming model with floating exchange rate
A central bank reduces the money supply in an economy initially in long-run
equilibrium.
a. What will happen to output and prices in the short run?
b. What will happen to unemployment in the short run?
c. What will happen to output and prices in the long run?
An alternative to Prescott’s explanation of the cyclical behavior of the Solow residual is
that it is the result of:
A) labor hoarding in recession and cyclical mismeasurement of output.
B) bad weather, strict environmental regulations, and oil shocks.
C) declines in capital utilization and labor force participation.
D) technology shocks.
John Maynard Keynes wrote that responsibility for low income and high unemployment
in economic downturns should be placed on:
A) low levels of capital.
B) an untrained labor force.
C) inadequate technology.
D) low aggregate demand.
Checking account balances that are linked to debit cards are included in:
A) M1.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.
A decrease in the real money supply, other things being equal, will shift the LM curve:
A) downward and to the left.
B) upward and to the left.
C) downward and to the right.
D) upward and to the right.
Each of the following phenomena hinders the precise estimation of the natural rate of
unemployment except:
A) supply shocks such as oil price increases.
B) demographic changes such as the aging baby boomers.
C) policy changes such as minimum wage increases.
D) introduction of new products such as DVD players.
The most prominent feature of the U.S. economy in the 1980s was:
A) cost-push inflation.
B) cost-push deflation.
C) demand-pull inflation.
D) demand-pull deflation.
The IS curve provides combinations of interest rates and income that satisfy equilibrium
in the market for ______, and the LM curve provides combinations of interest rates and
income that satisfy equilibrium in the market for ______.
A) saving and investment; planned spending
B) real-money balances; loanable funds
C) goods and services; real money balances
D) real-money balances; goods and services
National saving is:
A) private saving.
B) public saving.
C) private saving plus public saving.
D) private saving minus public saving.
In the dynamic model, the demand for goods and services will ____ as the natural rate
of output increases and _____ as the real interest rate increases.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
All of the following are examples of shadow banks except:
A) Bear Sterns
B) AIG
C) Bank of America
D) Lehman Brothers
The Solow model predicts that two economies will converge if the economies start with
the same:
A) capital stocks.
B) populations.
C) steady states.
D) production functions.
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C
= 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 ” 100r, where r is the
real interest rate in percent. No government exists. In this case, the equilibrium real
interest rate is:
A) 2 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.
Exhibit: Budget Constraint
(Exhibit: Budget Constraint) Based on the graph, if Y1 and Y2 represent income in
period one and period two, respectively, at which point along the budget constraint
would a consumer be a borrower in period one?
A) A
B) B
C) C
D) D
Use the aggregate demand”aggregate supply model to graphically illustrate the
difference between demand-pull and cost-push inflation. Explain your graphs in words.
What is the difference between recession and depression in an economy? Provide an
example of depression from the real world that has hit the global economy.
How can the government expenditure multiplier be reinterpreted in terms of savings?
An increase in money supply shifts the LM curve to the right, but an increase in money
demand shifts the LM curve to the left. Explain why there is a difference.
In 2014, the United States had budget deficit of $483 billion. Some economists say that
this deficit is understated. Why do they say this?
The closed economy of Moneyland has total income of $5000, consumption function
isC = 2000 ” 30r, investment function I = 1500 ” 20r, government spending is $2000, r
is nominal interest rate. Inflation is 6 percent. Find the real rate of interest.
Real GDP per capita is an imperfect measure of economic well-being because it does
not value home production or production in the underground economy, among other
factors. Give at least two examples that show why the omission of these types of items
will make a difference in evaluating economic well-being. One example should explain
how the omissions distort comparisons of economic well-being across countries and the
other example should explain how the omission distorts comparisons of economic
well-being in the same country over time.
Many times a monetary policy does not have the effect on the economy that is desired
by the regulator. Why does this happen?
Compare the impact of an increase in investment demand in a small open economy and
a large open economy. Assume prices are flexible, factors of production are fully
employed in both countries and there is perfect capital mobility in the small open
economy.
Explain briefly the types of investment spending.
A decrease in government spending reduces output more in the Keynesian-cross model
than in the IS“LM model. Explain why this is true.
The government of a small open economy with perfect capital mobility wants to
establish a ‘stronger” currency by moving its exchange rate higher. Suggest both an
appropriate monetary policy adjustment and an appropriate fiscal policy adjustment that
would allow the economy to move to a higher exchange rate. What are the
consequences of these adjustments on domestic output and net exports?
Explain aggregate supply. Why is the aggregate supply curve vertical in the long run
and horizontal in the short run?
Some taxpayers voluntarily have more taxes withheld from their paychecks during the
year in order to receive a large tax refund once a year. These taxpayers give the
government an interest-free loan and lose the interest they could have earned by saving
a portion of the larger paychecks they would have received during the year. Why might
a person make this choice? What does this choice say about the theory of the
consumption function?
Refer the following table showing the quantity of toothpastes that are demanded at
different prices. Identify the price (as shown in the first column below in the table) that
represents the market clearing.
What are the spending hypothesis and monetary hypothesis? Illustrate your answer with
examples.
Define Golden Rule level of capital”. How is it denoted?
capital and is denoted by k*gold
What are the problems which hinder any direct transaction between the lender and
borrower? What role do banks play in mitigating those issues?
Illustrate the use of discounting in the consumer budget constraint.