Each of the following conditions will tend to reduce the sacrifice ratio except when:
A) workers and firms set wages and prices based on rational expectations.
B) policymakers make credible commitments to policy changes.
C) announcements of policy changes are made before workers and firms have formed
expectations.
D) the concept of hysteresis accurately describes the impact of history on the natural
rate of unemployment.
According to the traditional viewpoint of government debt, a tax cut without a cut in
government spending:
A) stimulates consumer spending in the short run and reduces national saving.
B) stimulates consumer spending in the short run and reduces private saving.
C) has no effect on consumer spending but reduces national saving.
D) has no effect on consumer spending but reduces private saving.
The IS curve generally determines:
A) income.
B) the interest rate.
C) both income and the interest rate.
D) neither income nor the interest rate.
A recession may alter an economy’s natural rate of unemployment in all of the
following ways except by:
A) changing an unemployed individual’s attitude toward work.
B) reducing an unemployed worker’s job skills.
C) permanently reducing the money supply.
D) altering the wage-setting process.
The short-run aggregate supply curve is horizontal at:
A) a level of output determined by aggregate demand.
B) the natural level of output.
C) the level of output at which the economy’s resources are fully employed.
D) a fixed price level.
All of the following are considered major functions of money except as a:
A) medium of exchange.
B) way to display wealth.
C) unit of account.
D) store of value.
According to the sticky-price model, deviations of output from the natural level are
_____ deviations of the price level from the expected price level.
A) positively associated with
B) negatively associated with
C) not related to
D) equal to
The price received by each factor of production for its services is determined by:
A) demand for output and supply of factors.
B) demand for factors and supply of output.
C) demand and supply of output.
D) demand and supply of factors.
Possible explanations put forth for the Great Depression do not include:
A) a shift in the IS curve.
B) a shift in the LM curve.
C) the debt-deflation theory.
D) the Pigou effect.
Exhibit: Capital”Labor Ratio and the Steady State
In this graph, capital”labor ratio k2 is not the steady-state capital”labor ratio because:
A) the saving rate is too high.
B) the investment ratio is too high.
C) gross investment is greater than depreciation.
D) depreciation is greater than gross investment.
The formula for the steady-state ratio of capital to labor (k*) with population growth at
rate n but no technological change, where s is the saving rate, is s:
A) divided by the sum of the depreciation rate plus n.
B) multiplied by the sum of the depreciation rate plus n.
C) divided by the product of f(k*) and the sum of the depreciation rate plus n.
D) multiplied by f(k*) divided by the sum of the depreciation rate plus n.
If consumers obey the permanent-income hypothesis and have rational expectations,
then ______ policy changes influence consumption.
A) only unexpected
B) only expected
C) both expected and unexpected
D) neither expected nor unexpected
The real return on holding money is:
A) the real interest rate.
B) minus the real interest rate.
C) the inflation rate.
D) minus the inflation rate.
Franco Modigliani’s life-cycle hypothesis puts great emphasis on saving for:
A) a house.
B) a car.
C) retirement.
D) medical emergencies.
Frictional unemployment is inevitable because:
A) different sectors do not shift.
B) the economy needs to be lubricated.
C) workers never quit their jobs to change careers.
D) the demand for different goods always fluctuates.
If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed
workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of
employed workers who lose their jobs each month (the rate of job separations) must be:
A) 0.08.
B) 0.125.
C) 0.22.
D) 0.435.
Conducting fiscal policy so that G = T, where G is government expenditures and T is
tax revenue, is an example of a(n):
A) active rule.
B) passive rule.
C) discretionary policy.
D) automatic stabilizer.
The international impacts of a debt-financed tax cut, according to the traditional view of
government debt, are a(n) ______ in net exports and a domestic currency _____.
A) increase; appreciation
B) increase; depreciation
C) decrease; depreciation
D) decrease; appreciation
One argument in favor of tax cuts over spending-based fiscal stimulus is that:
A) tax cuts increase the MPC by a larger amount than government spending.
B) tax cuts temporarily increase planned spending, but government spending
permanently increases private spending.
C) in theory the tax multiplier is larger than the government spending multiplier.
D) historically tax cuts have been more successful than spending-based fiscal stimulus.
Starting from long-run equilibrium, if the velocity of money increases (due to, for
example, the invention of automatic teller machines) and no action is taken by the
government:
A) prices will rise in both the short run and the long run.
B) output will rise in both the short run and the long run.
C) prices will rise in the short run and output will rise in the long run.
D) output will rise in the short run and prices will rise in the long run.
A firm renting out capital does not bear as cost the:
A) lost interest it could have earned by depositing the purchase price of the capital in a
bank.
B) wear and tear on the capital.
C) wages of the labor that works with the capital.
D) capital loss or gain in the asset’s value.
In the classical model with fixed income, if households want to save more than firms
want to invest, then:
A) the interest rate rises.
B) the interest rate falls.
C) output increases.
D) output falls.
According to Modigliani’s life-cycle hypothesis, the consumption function shifts
upward as _____ increases.
A) income
B) wealth
C) the marginal propensity to consume out of income
D) the number of years until retirement
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 short-run nonneutrality of money is
represented by the movement from:
A) A to B
B) A to G
C) A to C
D) A to D
The political business cycle refers to the:
A) pattern of holding primaries, conventions, and general elections every four years.
B) cycle of electing U.S. representatives every two years, the U.S. president every four
years, and U.S. senators every six years.
C) manipulation of the economy to win elections.
D) pattern of recession and expansion that follows every election.
Protectionist policies in a small open economy do not alter the trade balance because
the:
A) quantity of imports and exports is fixed.
B) interest rate adjusts to offset any reductions in imports.
C) exchange rate appreciates to offset the increase in net exports.
D) level of net capital outflow is fixed by the world interest rate.
Obtaining funds for a business by issuing ownership shares, such as through the stock
market, is called _____ finance.
A) money
B) liability
C) debt
D) equity
In Irving Fisher’s two-period model, consumption for a consumer with a binding
borrowing constraint equals an amount that is:
A) equal to current income.
B) greater than current income.
C) equal to future income.
D) greater than future income.
The income velocity of money increases and the money demand parameter k ______
when people want to hold ______ money.
A) increases; more
B) increases; less
C) decreases; more
D) decreases; less
During the 2008″2009 period, the conventional monetary policy response was to _____
the target federal funds rate, while the conventional fiscal policy response was to _____
taxes and to _____ government spending.
A) increase; increase; increase
B) decrease; decrease; decrease
C) increase; increase; decrease
D) decrease; decrease; increase
The investment function slopes ______ because there are ______ investment projects
that are profitable as the interest rate decreases.
A) upward; fewer
B) upward; more
C) downward; fewer
D) downward; more
Most economists believe:
A) the Great Depression is very likely to be repeated.
B) it is likely that the money supply might again fall by one-fourth, but that fiscal
policy would be expansionary enough in this case to avoid a Great Depression.
C) it is unlikely that the money supply might fall again by one-fourth, but it is likely
that fiscal policy might be so contractionary as to cause a Great Depression.
D) in view of what economists now know about monetary and fiscal policy, and in view
of institutional changes, a repeat of the Great Depression is unlikely.
If consumption depends positively on the level of real balances and real balances
depend negatively on the nominal interest rate in a neoclassical model, then the nominal
interest rate:
A) declines when the money growth rate rises.
B) is unchanged when the money growth rate rises.
C) rises 1 percent for each 1 percent rise in the money growth rate.
D) rises less than 1 percent for each 1 percent rise in the money growth rate.
If the marginal product of capital net depreciation equals 8 percent, the rate of growth
of population equals 2 percent, and the rate of labor-augmenting technical progress
equals 2 percent, to reach the Golden Rule level of the capital stock, the ____ rate in
this economy must be _____.
A) saving; increased.
B) population growth; decreased
C) depreciation; decreased
D) total output growth; decreased
According to the theory of liquidity preference, the supply of nominal money balances:
A) is chosen by the central bank.
B) depends on the interest rate.
C) varies with the price level.
D) changes as the level of income changes.