People use money as a medium of exchange when they:
A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.
The dynamic aggregate demand curve will shift to the right if there is a:
A) tax cut.
B) cut in government spending.
C) decrease in the money supply.
D) cut in oil prices when the cartel falls apart.
Economists who view the economy as inherently unstable generally argue that:
A) stabilization policy is too dangerous to be used.
B) the economy should be stimulated when it is depressed and slowed when it is
overheated.
C) the economy should be slowed when it is depressed and stimulated when it is
overheated.
D) monetary and fiscal policies should follow rigid rules of constant growth.
An example of increasing returns to scale is when capital and labor inputs:
A) both increase 10 percent and output increases 5 percent.
B) both increase 10 percent and output increases 10 percent.
C) both increase 5 percent and output increases 10 percent.
D) do not change and output decreases 5 percent.
The aggregate demand curve tells us possible:
A) combinations of M and Y for a given value of P.
B) combinations of M and P for a given value of Y.
C) combinations of P and Y for a given value of M.
D) results if the Federal Reserve reduces the money supply.
After examining international data, the economist Robert Lucas found that aggregate
demand has the biggest effect on output in countries where aggregate demand:
A) and prices are most stable.
B) and prices are most variable.
C) is most stable but prices are most variable.
D) is most variable but prices are most stable.
If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion,
what is the value of real GDP in 2009?
A) $12 trillion
B) $12.5 trillion
C) $15 trillion
D) $18.75 trillion
Other things equal, an expected deflation can change demand by:
A) lowering the demand for money, thus shifting the LM curve.
B) increasing the demand for money, thus shifting the LM curve.
C) raising the real interest rate for any given nominal interest rate, thus reducing desired
investment.
D) lowering the real interest rate for any given nominal interest rate, thus increasing
desired investment.
Risk that affects many businesses at the same time is called _____ risk, while risk
associated with individual businesses is called _____ risk.
A) asymmetric; symmetric
B) symmetric; asymmetric
C) systematic; idiosyncratic
D) idiosyncratic; systematic
The real rental price of capital is the price per unit of capital measured in:
A) dollars.
B) units of output.
C) units of labor.
D) units of capital.
The intersection of the IS* and LM* curves shows the ______ and the ______ at which
both the goods market and the money market are in equilibrium.
A) interest rate; price level
B) price level; exchange rate
C) level of output; exchange rate
D) level of output; price level
The introduction of automatic teller machines, which reduces the demand for money,
will, according to the Mundell”Fleming model with floating exchange rates, lead to:
A) no change in income and net exports.
B) no change in income but a rise in net exports.
C) a rise in income but no change in net exports.
D) a rise in both income and net exports.
In the Solow growth model of Chapter 8, where s is the saving rate, y is output per
worker, and i is investment per worker, consumption per worker (c) equals:
A) sy
B) (1 ” s)y
C) (1 + s)y
D) (1 ” s)y ” i
If two economies are identical (including having the same saving rates, population
growth rates, and efficiency of labor), but one economy has a smaller capital stock, then
the steady-state level of income per worker in the economy with the smaller capital
stock:
A) will be at a lower level than in the steady state of the high capital economy.
B) will be at a higher level than in the steady state of the high capital economy.
C) will be at the same level as in the steady state of the high capital economy.
D) will be proportional to the ratio of the capital stocks in the two economies.
A situation in which one party to an economic transaction has more knowledge about
the transaction than the other is called:
A) risk aversion.
B) asymmetric information.
C) systematic risk
D) learning by doing.
The reduction in investment brought about by the increase in the interest rate caused by
increased government spending is called:
A) a budget deficit.
B) fiscal policy.
C) the identification problem.
D) crowding out.
When saving (the supply of loanable funds) increases as the interest rate increases, an
increase in investment demand results in a ______ interest rate and ______ in the
quantity of investment.
A) higher; no change
B) higher; an increase
C) lower; no change
D) lower; an increase
The government-purchases multiplier indicates how much ______ change(s) in
response to a $1 change in government purchases.
A) the budget deficit
B) consumption
C) income
D) real balances
Explain how net capital outflows change in a large open economy when there is a:
a. monetary contraction
b. fiscal contraction.
In the two-sector endogenous growth model, the saving rate (s) affects the steady-state:
A) level of income.
B) growth rate of income.
C) level of income and growth rate of income.
D) growth rate of the stock of knowledge.
If an increasing proportion of the adult population is retired, then the labor force
participation rate:
A) will increase.
B) will decrease.
C) will remain constant.
D) may increase, decrease, or remain constant.
The value of net exports is also the value of:
A) net investment.
B) net saving.
C) national saving.
D) the excess of national saving over domestic investment.
Which of the following would be represented by a negative value of the random supply
shock, ut?
A) an irrational wave of pessimism among investors
B) a decrease in government spending
C) oil price decreases resulting from a breakdown in the cartel
D) a decrease in the central bank’s inflation target
One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy
response can be represented in the IS“LM model by shifting the ______ curve to the
______.
A) LM; right
B) LM; left
C) IS; right
D) IS; left
The quantity equation of money can be re-written as the quantity theory of money when
we assume velocity of money (V) to be constant. Assume there are three possible
developments:
a. There is a rise in the number of shopping malls.
b. There is a rise in the number of banks operating.
c. There is a rise in the number of ATMs.
Which of the above can alter the money velocity, and how?
All of the following are ways that the modern Phillips curve differs from the
relationship observed by A. W. Phillips in 1958 except that the modern Phillips curve:
A) substitutes the output gap for unemployment.
B) includes supply shocks.
C) includes expected inflation.
D) substitutes price inflation for wage inflation.
In an economy with no population growth and no technological change, steady-state
consumption is at its greatest possible level when the marginal product of:
A) labor equals the marginal product of capital.
B) labor equals the depreciation rate.
C) capital equals the depreciation rate.
D) capital equals zero.
Proponents of Ricardian equivalence argue that if taxes are cut without cutting
government spending and taxes are not expected to increase in the future until after an
individual expects to be dead, then the individual will:
A) spend all of the increase in income.
B) spend some of the increase in income and save the rest.
C) use the increase in income to buy government bonds to help finance the deficit.
D) save all of the increase in income and leave it as a bequest to his or her children.
If the Fed accommodates an adverse supply shock, output falls ______ and prices rise
______.
A) less; more
B) less; less
C) more; less
D) more; more
The Pigou effect suggests that falling prices will increase income because real balances
influence ______ and will shift the ______ curve.
A) money demand; LM
B) the money supply; LM
C) consumer spending; IS
D) government spending; IS
GDP is the market value of all ______ goods and services produced within an economy
in a given period of time.
A) used
B) intermediate
C) consumer
D) final
The number of effective workers takes into account the number of workers and the:
A) amount of capital available to each worker.
B) rate of growth of the number of workers.
C) efficiency of each worker.
D) saving rate of each worker.
In the Mundell”Fleming model, the exogenous variables are the:
A) world interest rate, the price level, and the exchange rate.
B) level of government spending, taxes, and income.
C) exchange rate and level of income.
D) price level, world interest rate, monetary policy, and fiscal policy.
Were the forecasts made by several renowned economists at the time of the Great
Depression and the recession of 2008-2009 all correct?
What are the two anomalies that arose against Keynes’s conjecture that the average
propensity to consume falls as income rises?
If the economy were at a steady-state unemployment rate with a separation rate of 0.02
per month and a job-finding rate of 0.10 per month, and the labor force was 100
million, how many individuals would lose their jobs each month?
Fiscal policy is a tool the government uses to steer the economy of a country. What are
the advantages of active fiscal policy over passive fiscal policy?
A change in money supply shifts the LM curve downward. Explain why.
One of the key distinctions made in the analysis of the Solow growth model is between
changes in levels and changes in growth rates. How does an increase in the rate of
population growth change the steady-state levels and growth rates of output and output
per worker in the Solow model with no technological change?
Why can the Federal Reserve not control the money supply with complete accuracy?
The money demand function can be written as L (i, Y). Given the Fisher equation, this
means that the money demand function of the population already takes into account
inflation (i = r + π). Why do you think people have a problem with inflation?
How would an adverse supply shock change the short-run tradeoff between inflation
and unemployment? Illustrate your answer using a Phillips curve diagram.
What does the Solow model predict about convergence? Why does conditional
convergence occur?
How does an economy make a transition from short run to long run?
Explain why additional capital generates both positive and negative impacts on
steady-state consumption per worker in the Solow growth model with population
growth and technological change.
In the 2008 global financial crisis, many investors considered the U.S. economy a safe
place to move their assets. What is the predicted impact of this inflow of financial
capital to the United States, which is a large open economy, on the U.S. interest rate and
the U.S. exchange rate, holding other factors constant? Illustrate your answer
graphically and explain in words.
Use the IS“LM model to illustrate graphically the impact of the Pigou effect on the
equilibrium level of income and interest rate during the Great Depression, when prices
were falling.
Use the neoclassical model of business fixed investment to illustrate graphically how a
hurricane that destroys a large amount of capital (holding other factors constant) would
change the rental price of capital. If other factors remained unchanged, how would this
change the quantity of investment spending in the economy?
How do changes in wealth shift the consumption functionin the long run?
During periods of economic downturn, there is frequently pressure to protect domestic
production from foreign competition in the belief that protectionist policies will save
domestic jobs. Will protectionist policies increase or decrease domestic production in a
large open economy with a floating exchange rate, holding all else constant? Illustrate
your answer graphically and explain in words.
If there are no unexpected changes in money supply in an economy, can there still be
unexpected inflation in the economy?
Explain how tax cuts can affect both aggregate demand and aggregate supply.