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In the classical model with fixed income, a reduction in the government budget deficit
will lead to a:
A) higher real interest rate.
B) lower real interest rate.
C) higher level of output.
D) lower level of output.
Economic booms should stimulate investment spending because during booms:
A) the real interest rate increases.
B) corporate tax rates usually increase.
C) the purchase price of capital increases.
D) higher levels of employment increase the marginal product of capital.
When an economy begins below the Golden Rule, reaching the Golden Rule:
A) produces lower consumption at all times in the future.
B) produces higher consumption at all times in the future.
C) requires initially reducing consumption to increase consumption in the future.
D) requires initially increasing consumption to decrease consumption in the future.
A borrowing constraint that is not binding occurs when a consumer wants to consume
______ in period one than he or she earns in period(s) _____.
A) less; one
B) more; one
C) less; one and two
D) more; one and two
Important characteristics of macroeconomic models include all of the following except:
A) simplifying assumptions.
B) functional relationships based on controlled experiments.
C) endogenous and exogenous variables.
D) implicit or explicit consistency with microeconomic foundations.
The phrase _____ describes a firm so central to that financial system that policymakers
will not allow it to enter bankruptcy.
A) "no bank left behind"
B) "too big to fail"
C) "don't fail, don't bail"
D) "laissez-faire bank"
All of the following may have contributed to the financial crisis and economic downturn
of 2008"2009 except:
A) high inflation.
B) low interest rates.
C) stock market volatility.
D) falling house prices.
In a short-run model of a large open economy with a floating exchange rate:
A) net exports determine the exchange rate, which in turn determines net capital
outflow.
B) net exports determine net capital outflow, which determines the interest rate.
C) the interest rate is determined in the IS"LM framework, and this value determines net
capital outflow; then the exchange rate adjusts to make net exports equal net capital
outflow.
D) the interest rate determines investment and net capital outflow, which are equal
within the IS"LM framework; the exchange rate then determines net exports.
In a small open economy, starting from a position of balanced trade, if the government
increases domestic government purchases, this produces a tendency toward a trade
______ and ______ net capital outflow.
A) deficit; negative
B) surplus; positive
C) deficit; positive
D) surplus; negative
According to the imperfect-information model, in countries in which there is a great
deal of variability of prices:
A) the response of output to unexpected changes in prices will be relatively large.
B) the response of output to unexpected changes in prices will be relatively small.
C) output will respond negatively to an unexpected rise in prices.
D) output will not respond to an unexpected change in prices.
A competitive firm:
A) is small relative to the market in which it trades.
B) has to charge a lower price when it wants to sell more goods.
C) has several large competitors with whom it engages in fierce competition.
D) can set the wage at which it hires workers.
Starting from long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, a one-period positive supply shock causes output to:
A) remain above the natural level for only one period.
B) remain above the natural level for more than one period.
C) remain below the natural level for only one period.
D) remain below the natural level for more than one period.
An example of a real variable is the:
A) dollar wage a person earns.
B) quantity of goods produced in a year.
C) price level.
D) nominal interest rate.
The short-run aggregate supply curve is drawn for a given:
A) output level.
B) price level.
C) expected price level.
D) level of aggregate demand.
The negative relationship between inflation and the quantity of goods and services
demanded comes about because of the:
A) Phillips curve.
B) monetary policy rule.
C) assumption of adaptive expectations.
D) Fisher effect.
Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and
government debt at the beginning of the year equals $4 trillion. By how much is the
government budget deficit overstated as a result of inflation?
A) $0.12 trillion
B) $0.32 trillion
C) $0.44 trillion
D) $0.80 trillion
An increase in the saving rate starting from a steady state with less capital than the
Golden Rule causes investment to ______ in the transition to the new steady state.
A) increase
B) decrease
C) first increase, then decrease
D) first decrease, then increase
If currency held by the public equals $100 billion, reserves held by banks equal $50
billion, and bank deposits equal $500 billion, then the money supply equals:
A) $100 billion.
B) $150 billion.
C) $600 billion.
D) $650 billion.
In John Maynard Keynes's model, the most important determinant of current
consumption is current income. In Irving Fisher's model, the most important
determinant of current consumption is:
A) also current income.
B) the interest rate.
C) lifetime resources.
D) future income.
Short-run Phillips Curve
(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to
C to D, policymakers face:
A) the same tradeoff between inflation and unemployment.
B) a lower rate of inflation for any level of unemployment.
C) a higher rate of inflation for any level of unemployment.
D) higher than expected inflation rates and lower unemployment rates.
According to advocates of rational expectations, traditional estimates of the sacrifice
ratio are unreliable because they:
A) ignore inside lags.
B) overestimate outside lags.
C) are based on adaptive expectations.
D) are time inconsistent.
Which of the following statements correctly describes European labor markets?
A) In recent years, the unemployment rate in every European country has been higher
than the unemployment rate in the United States.
B) In recent years, the average unemployment rate in Europe has been higher than the
unemployment rate in the United States.
C) Within Europe the short-term unemployment rate shows greater variability across
countries than does the long-term unemployment rate.
D) European countries with more generous unemployment insurance tend to have lower
unemployment rates.
According to the natural-rate hypothesis, output will be at the natural rate:
A) if inflation exceeds expected inflation.
B) if inflation falls below expected inflation.
C) in the long run.
D) if aggregate demand affects output in the long run.
The hypothesis that hysteresis may play an important role in macroeconomics implies,
among other things, that:
A) the history of economic thought is important to macroeconomics.
B) workers get hysterical during long depressions.
C) hysteresis lowers the sacrifice ratio.
D) the natural rate of unemployment may increase if unemployment is high for a long
period of time.
If an economy with no population growth or technological change has a steady-state
MPK of 0.1, a depreciation rate of 0.1, and a saving rate of 0.2, then the steady-state
capital stock:
A) is greater than the Golden Rule level.
B) is less than the Golden Rule level.
C) equals the Golden Rule level.
D) could be either above or below the Golden Rule level.
If the short-run aggregate supply curve is steep, the Phillips curve will be:
A) flat.
B) steep.
C) backward-bending.
D) unrelated to the slope of the short-run aggregate supply curve.
An assumption of _______ is more plausible for studying the short-run behavior of the
economy, while an assumption of ______ is more plausible for studying the long-run,
equilibrium behavior of the economy.
A) deflation; inflation
B) inflation; deflation
C) flexible prices; sticky prices
D) sticky prices; flexible prices
One way to shift the tax burden from the current generation to future generations is to
finance a war:
A) by raising taxes.
B) by printing money.
C) by running a budget surplus.
D) by running a budget deficit.
In a small open economy, if the government adopts a policy that lowers imports, then
the quantity of exports:
A) remains unchanged.
B) decreases but not as much as the quantity of imports decreases.
C) decreases by exactly the same amount as the quantity of imports decreases.
D) decreases by more than the quantity of imports decreases.
The use of borrowed funds to supplement existing funds for purposes of investment is
called:
A) arbitrage.
B) leverage.
C) convergence.
D) intermediation.
