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The underground economy:
A) is included in the latest GDP accounts.
B) includes only illegal activities.
C) includes domestic workers for whom Social Security tax is not collected.
D) excludes the illegal drug trade.
In the IS"LM model when M/P rises, in short-run equilibrium, in the usual case the
interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Country risk included in the risk premium in interest rates refers to the:
A) additional costs incurred when loans are made in currencies other than the domestic
currency.
B) possibility that loans in some countries may not be repaid because of political
upheaval.
C) expectation that the exchange rate may change in the future.
D) potential change in the terms of trade between countries.
If domestic spending exceeds output, we ______ the differencenet exports are ______.
A) import; negative
B) export; positive
C) import; positive
D) export; negative
If the fraction of employed workers who lose their jobs each month (the rate of job
separations) is 0.01 and the fraction of the unemployed who find a job each month is
0.09 (the rate of job findings), then the natural rate of unemployment is:
A) 1 percent.
B) 9 percent.
C) 10 percent.
D) about 11 percent.
Other things equal, an increase in the interest rate leads to:
A) a decrease in the quantity of investment goods demanded.
B) no change in the quantity of investment goods demanded.
C) an increase in the quantity of investment goods demanded.
D) sometimes an increase and sometimes a decrease in the quantity of investment goods
demanded.
If the Federal Reserve increases the interest rate paid on reserves, banks will tend to
hold _____ excess reserves, which will _____ the money multiplier.
A) more; increase
B) more; decrease
C) fewer; increase
D) fewer; decrease
Short-term unemployment is most likely to be ______ unemployment, while long-term
unemployment is mostly likely to be _____ unemployment.
A) structural; frictional
B) structural; the natural rate of
C) the natural rate of; frictional
D) frictional; structural
If disposable income is 4,000, consumption is 3,500, government spending is 1,000,
and taxes minus transfers are 800, national saving is equal to:
A) 300.
B) 500.
C) 700.
D) 1,000.
The two most important factors of production are:
A) goods and services.
B) labor and energy.
C) capital and labor.
D) saving and investment.
The short-run Phillips curve:
A) shifts upward if expected inflation increases.
B) shifts upward if expected inflation decreases.
C) shifts downward if expected inflation increases.
D) is vertical.
The macroeconomic problem that affects individuals most directly and severely is:
A) inflation.
B) unemployment.
C) low savings.
D) low investment.
According to the theory of liquidity preference, the supply of real money balances:
A) decreases as the interest rate increases.
B) increases as the interest rate increases.
C) increases as income increases.
D) is fixed.
Public policy to increase the job finding rate include _____ and public policy to
decrease the job separation rate include _____.
A) government employment agencies; higher unemployment insurance benefits
B) job training programs; 100 percent experience rated unemployment insurance
C) higher minimum wage laws; payment of unemployment benefits for longer periods
D) higher efficiency wages; partially experience rated unemployment insurance
An adverse supply shock ______ the short-run aggregate supply curve ______ the
natural level of output.
A) raises; but cannot affect
B) raises; and may also lower
C) lowers; but cannot affect
D) lowers; and may also lower
A monetary union with a common currency is an example of a:
A) fixed-exchange-rate system.
B) flexible-exchange-rate system.
C) small open economy.
D) large open economy.
The estimate of the sacrifice ratio from the Volcker disinflation is approximately:
A) 5"6.
B) 2.5"3.
C) 1"1.5.
D) 0"0.5.
The precipitous fall in the price of assets that takes place when financial institutions
must sell their assets quickly in the midst of a crisis is called a(n):
A) insolvency.
B) subprime sale
C) speculative bubble.
D) fire sale.
According to the Kremerian model, large populations improve living standards because:
A) crowded conditions put more pressure on people to work hard.
B) there are more people who can make discoveries and contribute to innovation.
C) more people have the opportunity for leisure and recreation.
D) most people prefer to live with many other people.
According to Modigliani's life-cycle hypothesis, if a consumer wants equal
consumption in every year, and the interest rate is zero, there are 40 years until
retirement, and 60 years of life remaining, then the marginal propensity to consume out
of income equals:
A) 0.016.
B) 0.40.
C) 0.60.
D) 0.67.
The government raises lump-sum taxes on income by $100 billion, and the neoclassical
economy adjusts so that output does not change. If the marginal propensity to consume
is 0.6, private saving:
A) rises by $40 billion.
B) rises by $60 billion.
C) falls by $60 billion.
D) falls by $40 billion.
In the long run, the level of output is determined by the:
A) interaction of supply and demand.
B) money supply and the levels of government spending and taxation.
C) amounts of capital and labor and the available technology.
D) preferences of the public.
If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657,
investment is $741, and net exports are "$1,910, then government purchases are:
A) $2,977.
B) $1,910.
C) "$843.
D) $1,067.
Paying efficiency wages helps firms reduce the problem of moral hazard by:
A) generating additional profits that can be used to improve working conditions.
B) matching the wages each worker is paid to the number of units of output each
worker produces.
C) encouraging unsupervised workers to maintain a high level of productivity.
D) providing an incentive for the best-qualified workers to remain with the firm.
Government debt equals the:
A) difference between current government purchases and taxes.
B) difference between saving and investment.
C) sum of past budget deficits and surpluses.
D) M1 money supply.
Stagflation occurs when prices ______ and output ______.
A) fall; falls
B) fall; increases
C) rise; falls
D) rise; increases
The opportunity cost of holding money is the:
A) nominal interest rate.
B) real interest rate.
C) federal funds rate.
D) prevailing Treasury bill rate.
If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the
current money supply the equilibrium exchange rate was 150 yen per dollar, then:
A) arbitrageurs would sell yen in the marketplace.
B) arbitrageurs would buy yen from the Fed.
C) the money supply would fall until the market exchange rate was 100 yen per dollar.
D) the money supply would rise until the market exchange rate was 100 yen per dollar.
In the national income accounts, government purchases are goods and services
purchased by:
A) the federal government.
B) the federal and state governments.
C) the state and local governments.
D) the federal, state, and local governments.
Aggregate supply is the relationship between the quantity of goods and services
supplied and the:
A) money supply.
B) unemployment rate.
C) interest rate.
D) price level.
When the demand for loanable funds exceeds the supply of loanable funds, households
want to save ______ than firms want to invest and the interest rate ______.
A) more; rises
B) more; falls
C) less; rises
D) less; falls
If money demand does not depend on the interest rate, then the LM curve is ______ and
______ policy has no effect on output.
A) horizontal; fiscal
B) vertical; fiscal
C) horizontal; monetary
D) vertical; monetary
Accounting profit is:
A) economic profit minus the return to capital.
B) equal to economic profit.
C) economic profit plus the return to capital.
D) equal to the economic return to capital.
According to Keynes, what is the relationship between average propensity to consume
and income? What was his reasoning?
"The more unhealthy a person is, the more likely he or she is to take insurance," This is
a fact stated by an employee of a health insurance company. Is this issue related to
adverse selection? If yes, how?
The advent of interest-earning checking accounts in the early 1980s led many
households to keep a larger proportion of their wealth in checking accounts. Use the
aggregate demand"aggregate supply model to illustrate graphically the impact in the
short run and the long run of this change in money demand. Be sure to label: i. the axes;
ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the
short-run equilibrium values; and vi. the long-run equilibrium values. State in words
what happens to prices and output in the short run and the long run.
In an economy with flexible prices, competitive factor markets and fixed supplies of the
factors of production, graphically illustrate the impact of a change in immigration
policy in a country that permits a huge influx of foreign workers into the labor market,
ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
values; iv. the direction the curve's shift; and v. the terminal equilibrium values. Explain
in words how the equilibrium values of labor, the real wage, saving, investment, and the
real interest rate change.
A country has changed its labor laws and decreased the minimum age of working from
18 years to 16 years. What is the effect of this change on equilibrium wages?
What is the difference between the strengthening and weakening of domestic currency?
Explain.
Why does the Federal Reserve not have complete control over the size of the money
supply? Give at least two reasons.
What type of monetary or fiscal policy will generate both a 'stronger" economy
(increased Y) and a 'stronger" dollar (increased e) in a large open economy with a
floating exchange rate? Explain.
Are persistent increases in standard of living possible in a steady state economy?
Assume an economy in which the value of the GDP deflator is 2 and the current
inflation rate is 4 percent. Calculate the real and nominal interest rates.
If the rate of job separation is 0.02 per month and the rate of job finding is 0.10 per
month, what is the natural rate of unemployment?
What are the two kinds of firms in the economy, as described by the neoclassical
model?
When does a steady state occur?
Assume two countries have the same nominal GDP (measured in the same currency
using the same accounting rules). Explain at least three reasons why you cannot assume
that citizens in each country enjoy approximately the same level of economic
well-being.
Interest rates played a part in the 1984 U.S. presidential debates. Some politicians
claimed that interest rates rose over the 1981"1983 period, while others claimed rates
fell. Below is a table showing interest rates and annual inflation rates from 1981 to
1983.
Reconcile these conflicting claims.
What is the effect of an increase in interest rate on keeping government spending
constant on consumption and investment?
