If consumers are very foresighted, we would expect actual consumption spending to
A) increase during recessions.
B) increase during episodes of stagflation.
C) have no relation to wealth.
D) resemble a “random walk.”
E) be entirely predictable.
The primary deficit is
A) government spending minus interest on the debt.
B) government spending minus net tax revenues.
C) government spending plus interest on the debt minus net tax revenues.
D) government spending plus net tax revenues minus interest on the debt.
E) interest on the debt minus net tax revenues.
Which of the following occurs when the goods market is in equilibrium?
A) Domestic output (Y) equals the demand for domestic goods.
B) Y equals the domestic demand for goods.
C) Y equals the domestic demand for domestic goods.
D) Net exports equals 0.
E) Demand for domestic goods equals the domestic demand for goods.
If individuals do not hold currency, we know that
A) M = D.
B) H = R.
C) the money multiplier is 1/θ.
D) all of the above
Which of the following best defines the real exchange rate?
A) the price of foreign bonds in terms of domestic bonds
B) the price of foreign currency in terms of domestic currency
C) the price of domestic goods in terms of foreign goods
D) the price of domestic currency in terms of foreign currency
E) none of the above
Most economists would agree that, unless it incorporates rational expectations or
something like it, a model cannot account for
A) the Great Depression.
B) shifts in aggregate supply.
C) the relationship between consumption and income.
D) the stagflation of the 1970s.
E) the different initial impact of a permanent versus a temporary policy change.
The natural rate of interest is not
A) zero.
B) the neutral rate of interest.
C) Wicksellian rate of interest.
D) associated with the natural rate of unemployment.
Based on our understanding of the labor market model presented in Chapter 6, we know
that an increase in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
Which of the following is true when a country’s trade position is balanced (i.e., NX =
0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) Neither a budget surplus nor deficit exists (i.e., G – T = 0).
Which of the following will cause an increase in output per worker (Y/N)?
A) an increase in the capital stock (K)
B) an increase in the saving rate
C) an increase in K/N
D) all of the above
Which of the following will occur when an economy is faced with a liquidity trap
situation?
A) A reduction in the price level will cause a rightward shift in the aggregate demand
curve.
B) A reduction in the price level will cause a leftward shift in the aggregate demand
curve.
C) The aggregate demand curve is now vertical.
D) The aggregate demand curve is now upward sloping.
Assume that the one-year interest rate is on the vertical axis of the IS-LM model and
that the yield curve is initially upward sloping. Suppose that financial market
participants expect that the central bank will pursue a monetary contraction in the
future. Given this information, we would expect which of the following to occur?
A) The yield curve will become steeper.
B) The yield curve will become flatter.
C) The yield curve will become horizontal.
D) The yield curve will become downward sloping.
Human wealth is
A) the present discounted value of expected future after-tax labor income.
B) the sum of financial and housing wealth.
C) the discounted present value of all financial assets.
D) financial wealth minus housing wealth.
E) total wealth minus housing wealth.
Which of the following represents the ratio of coupon payments to the price of a bond?
A) the interest rate
B) the discount rate
C) the coupon rate
D) the risk premium
E) the current yield
From 1978 to 1995, the rate of growth of output per worker in China appears to be
A) the result of capital accumulation.
B) the result of technological progress.
C) the result of trade barriers.
D) equal to that of the United States.
E) none of the above
If the IS curve is relatively steep, then
A) there can be no long-run tradeoff between inflation and unemployment.
B) monetary policy cannot be very effective in changing GDP.
C) rational expectations theory is probably correct.
D) Ricardian equivalence most likely holds.
E) budget deficits will not affect future capital accumulation.
For this question, assume that individuals do not hold currency (i.e., c = 0). The money
multiplier is equal to
A) 1/(1-c).
An increase in the marginal propensity to import will cause
A) the multiplier to increase and a given change in government spending (G) to have a
larger effect on domestic output.
B) the multiplier to increase and a given change in government spending (G) to have a
smaller effect on domestic output.
C) the multiplier to decrease and a given change in government spending (G) to have a
larger effect on domestic output.
D) the multiplier to decrease and a given change in government spending (G) to have a
smaller effect on domestic output.
In an open economy, which of the following will cause an increase in the size of the
multiplier?
A) a reduction in the marginal propensity to import
B) a reduction foreign output
C) an increase in the marginal propensity to save
D) all of the above
E) none of the above
During which of the following decades was the debt-to-GDP ratio generally highest in
the United States?
A) 1930s
B) 1940s
C) 1960s
D) 1980s
E) 1990s
Which of the following is a main conclusion about growth for OECD countries and the
four rich countries examined in the chapter?
A) There has been a large increase in the standard of living since 1950.
B) The growth rates have decreased since the mid-1970s.
C) There has been a convergence of output per capita since 1950.
D) all of the above
E) none of the above
In recent years, real wages of the least educated workers
A) have increased faster than the real wages of college-educated workers.
B) have increased, but by less than the real wages of college-educated workers.
C) have decreased, but by less than the real wages of college-educated workers.
D) have decreased, while the real wages of college-educated workers have increased.
E) have decreased at about the same rate as the real wages of college-educated workers.
Suppose workers’ and firms’ expectations of the price level and productivity are
accurate. In this case, a reduction in productivity will cause which of the following?
A) a decrease in both the real wage and the natural rate of unemployment
B) an increase in both the real wage and the natural rate of unemployment
C) a decrease in the real wage and no change in the natural rate of unemployment
D) an increase in the real wage and a decrease in the natural rate of unemployment
E) none of the above
The existence of inflation does which of the following?
A) reduces tax distortions
B) allows governments to benefit from seignorage
C) reduces shoe-leather costs
D) reduces the costs associated with money illusion
“Ordinary least squares” is a technique that can be used to
A) identify the best model.
B) determine which variables in a model are endogenous and which are exogenous.
C) obtain a bar graph showing successive quarterly increases in output.
D) obtain a line describing consumption behavior in the real world.
E) determine the direction of causation between consumption and income.
Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system
with perfect capital mobility, an open market purchase of domestic bonds by the
domestic central bank will eventually result in
A) a permanent increase in the monetary base.
B) a permanent reduction in the monetary base.
C) a change in the composition of the monetary base.
D) a gradual reduction in the domestic interest rate.
The Ricardian Equivalence proposition suggests that a tax increase that causes a budget
surplus will
A) cause an increase in output.
B) cause no change in output.
C) cause a reduction in output.
D) a reduction in consumption.
For a given nominal interest rate, a reduction in expected inflation will cause
A) a reduction in the real interest rate.
B) an increase in the real interest rate.
C) an increase in investment.
D) an increase in money demand.
An increase in the aggregate price level, P, will most likely have which of the following
effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
Firms with ________ ratings are considered the safest.
A) AAA
B) BBB
C) CCC
D) BB
When estimating a regression line, a high R2‚ tells us we have
A) a good fit.
B) large residuals.
C) correctly determined the direction of causation.
D) all of the above
E) none of the above
We would expect which of the following to occur when the central bank pursues
expansionary monetary policy?
A) an increase in bond prices and an increase in the interest rate (i)
B) a reduction in bond prices and an increase in i
C) an increase in bond prices and a reduction in i
D) a reduction in bond prices and a reduction in i
E) none of the above
Explain how expectations affect consumption.
Suppose an increase in government spending occurs that is at least partially unexpected.
Explain what effect this will have on stock prices.
Explain several implications and characteristics of efficiency wage theories.
Suppose there is an increase in the saving rate. Explain what effect this will have on
output, output per worker, the rate of growth of output, and the rate of growth of output
per worker.
Explain what factors cause shifts and changes in the slope of the ZZ curve presented in
chapter 3.
Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes
both in the short run and in the medium run.
Based on the ‘early incarnation’ of the Phillips curve, explain what effect a decrease in
the unemployment rate will have on the inflation rate.
Discuss what is meant by the paradox of saving.
Briefly discuss the organization of the Federal Reserve. Include in your answer a
discussion of the individuals/groups who make decisions about monetary policy.
Explain “haircuts” when a government defaults its debt.
First, explain what the PS relation represents. Second, explain why it has its particular
shape.
Explain each of the following: 1. constant returns to scale; 2. decreasing returns to
capital; and 3. decreasing returns to labor.
Explain whether it is possible for nominal GDP to increase and real GDP to decrease in
the same period.
Based on your understanding of the Phillips curve, is it possible for the unemployment
rate to increase while inflation increases? Explain.
What is an “optimal currency area”? Also, discuss the conditions that must be satisfied
for an optimal currency area to exist.
Can an economy maintain high output growth, low unemployment, and low inflation at
the the same time? Explain.
Explain whether a policy that results in a larger budget deficit in the current period can
lead to a reduction in current output.
Why has the U.S. natural rate of unemployment fallen since the early 1990s?