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Holding other factors constant, a decline in the real interest rate will ______ the price of
housing and ______ the flow of residential housing investment.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Which of the following is an example of moral hazard?
A) The healthiest people buy life insurance.
B) The sickest people buy health insurance.
C) The person with health insurance rides a motorcycle without wearing a helmet.
D) The person with life insurance exercises daily and eats healthy foods.
An increase in income generated by an increase in the country risk premium will not
occur if there is a(n) ______ sufficient to offset the decline in the demand for money
caused by the higher risk premium.
A) decrease in the money supply
B) increase in the money supply
C) decrease in government spending
D) fall in the price level
Which of the following is an example of a relative price?
A) the real interest rate
B) the capital stock
C) the dollar wage per hour
D) the price level
Of the five endogenous variables in the dynamic model of aggregate demand and
aggregate supply, which are the real variables that do not depend on the monetary
policy in long-run equilibrium?
A) Yt and pt
B) it and rt
C) Etpt + 1 and pt
D) Yt and rt
The nominal interest rate is the:
A) rate of interest that investors pay to borrow money.
B) same as the real interest rate.
C) rate of inflation minus the real rate of interest.
D) real rate of interest minus the rate of inflation.
Arguments in favor of active economic policy include all of the following except:
A) failing to use monetary and fiscal policy leads to inefficient fluctuations in output
and employment.
B) the Great Depression could have been avoided if the Federal Reserve had pursued a
policy of steady money growth.
C) fluctuations in real GDP have been less severe following World War II than prior to
World War I.
D) failure of policymakers to respond to large contractionary shocks to private spending
caused the Great Depression.
If the marginal product of capital net of depreciation equals 10 percent and the rate of
population growth equals 2 percent, then this economy will be at the Golden Rule
steady state if the rate of technological progress equals _____ percent.
A) 0
B) 2
C) 8
D) 10
The average propensity to consume is the:
A) ratio of consumption to income.
B) amount consumed out of an additional dollar of income.
C) amount available for consumption after precautionary saving.
D) ratio of consumption to wealth.
Suppose that over the course of a year 100 people are unemployed for 4 weeks each
(the short-term unemployed), while 10 people are unemployed for 52 weeks each (the
long-term unemployed). Approximately what percentage of the total spells of
unemployment were attributable to the long-term unemployed?
A) 9 percent.
B) 10 percent.
C) 43.5 percent.
D) 56.5 percent.
Inflation targeting is a monetary policy rule that requires the central bank to adjust
_____ in order to attain the desired inflation rate.
A) a price index
B) the velocity of money
C) nominal GDP
D) the money supply
In the national income accounts, the purchase of durables, nondurables, and services by
households are classified as:
A) consumption.
B) investment.
C) government purchases.
D) net exports.
The NAIRU is the:
A) North American institutional rate of unemployment.
B) natural aggregate investment return on utilization.
C) nonaccelerating inflation rate of unemployment.
D) normal American inelastic rate of unemployment.
During World War II, economists using John Maynard Keynes's theory predicted that
the rate of saving after the war would be very:
A) high, and that is what happened.
B) low, and that is what happened.
C) low, but that did not happen.
D) high, but that did not happen.
Assume that in a small open economy where full employment always prevails, national
saving is 300.
a. If domestic investment is given by I = 400 " 20r, where r is the real interest rate in
percent, what would the equilibrium interest rate be if the economy were closed?
b. If the economy is open and the world interest rate is 10 percent, what will investment
be?
c. What will the current account surplus or deficit be? What will net capital outflow be?
Exhibit: IS"LM to Aggregate Demand
(Exhibit: IS"LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2
because the price level decreases from P1 to P2 then, holding other factors constant:
A) the aggregate demand curve will shift to the right.
B) the aggregate demand curve will shift to the left.
C) this represents a movement up the aggregate demand curve.
D) this represents a movement down the aggregate demand curve.
The assumption of continuous market clearing means that:
A) sellers can sell all that they want at the going price.
B) buyers can buy all that they want at the going price.
C) in any given month, buyers can buy all that they want and sellers can sell all that
they want at the going price.
D) at any given instant, buyers can buy all that they want and sellers can sell all that
they want at the going price.
a. You are the chief economic adviser in a small open economy with a
floating-exchange-rate system. Your boss, the president of the country, wishes to
increase the level of output in the short run in order to win reelection. Do you
recommend using expansionary or contractionary monetary or fiscal policy?
b. Use the Mundell"Fleming model to illustrate graphically your proposed policy. Be
sure to label: i. the axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction
the curves shift; and v. the new short-run equilibrium.
In the case of cost-push inflation, other things being equal:
A) both the inflation rate and the unemployment rate rise at the same time.
B) the unemployment rate rises but the inflation rate falls.
C) the inflation rate rises but the unemployment rate falls.
D) both the inflation rate and the unemployment rate fall.
A liquidity trap occurs when:
A) banks have too much currency and close their doors to new customers.
B) the central bank mistakenly prints too much money, generating hyperinflation.
C) interest rates fall so low that monetary policy is no longer effective.
D) dams and locks are built to prevent flooding.
In a small open economy, if domestic saving equals $50 billion and domestic
investment equals $50 billion, then there is ______ and net capital outflow equals
______.
A) a trade deficit; $100 billion
B) balanced trade; $0
C) a trade surplus; $100 billion
D) balanced trade; $100 billion
If the short-run aggregate supply curve is horizontal, and, if each member of the general
public chooses to hold a larger fraction of his or her income as cash balances, then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.
Along any given IS curve:
A) tax rates are fixed, but government spending varies.
B) government spending is fixed, but tax rates vary.
C) both government spending and tax rates vary.
D) both government spending and tax rates are fixed.
The Mundell"Fleming model is a ______ model for a ______ open economy.
A) short-run; small
B) short-run; large
C) long-run; large
D) long-run; small
When the consumer has chosen his or her optimal values of first-period and
second-period consumption, the marginal rate of substitution equals:
A) 1 plus the interest rate r.
B) 1 minus the interest rate r.
C) 1 divided by the interest rate r.
D) the interest rate r.
In the national income accounts, all of the following are classified as government
purchases except:
A) payments made to Social Security recipients.
B) services provided by police officers.
C) purchases of military hardware.
D) services provided by U.S. senators.
In the short-run, if the price level is greater than the expected price level, then in the
long run the aggregate:
A) demand curve will shift leftward.
B) demand curve will shift rightward.
C) supply curve will shift upward.
D) supply curve will shift downward.
An argument in favor of allowing discretionary macroeconomic policy is that:
A) policymakers may make erratic shifts in policy in response to changing political
situations.
B) uninformed policymakers may choose incorrect policies.
C) the objectives of policymakers may be in conflict with the well-being of the public.
D) giving policymakers flexibility will allow them to respond to changing conditions.
In a simple graphical model of the supply and demand for pizza with the price of pizza
measured vertically and the quantity of pizza measured horizontally:
A) the supply curve slopes upward and to the right.
B) the demand curve slopes upward and to the right.
C) the supply curve slopes downward and to the right.
D) at the equilibrium price, the supply of pizza exceeds the demand for pizza.
The Treasury used most of the funds allocated by the Troubled Asset Relief Program
(TARP) to:
A) purchase mortgage-backed securities.
B) make equity injections into troubled financial institutions.
C) create a new regulatory agency to oversee risky assets.
D) make emergency loans to the FDIC.
If the information technology boom increases investment demand in a small open
economy, then net exports ______ and the real exchange rate ______.
A) increase; appreciates
B) increase; depreciates
C) decrease; appreciates
D) decrease; depreciates
Exhibit: AD"AS Shifts
(Exhibit: AD"AS Shifts) Starting from long-run equilibrium at A with output equal to
and the price level equal to P1, if there is an unexpected monetary contraction that shifts
aggregate demand from AD1 to AD3, then the long-run neutrality of money is
represented by the movement from:
A) A to B
B) A to G
C) A to C
D) A to D
