Suppose there is a tax cut. This tax cut would have a direct effect on which of the
following?
A) financial wealth
B) housing wealth
C) human wealth
D) none of the above
The European Monetary System represented a
A) exchange rate regime with ‘bands.’
B) crawling peg.
C) a flexible exchange rate regime.
D) none of the above
A reduction in consumer confidence will 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
For this question, assume that workers expectations of the price level and productivity
are accurate. Now suppose that the economy experiences an increase in productivity.
Which of the following will occur in the medium run?
A) no change in unemployment
B) an increase in unemployment
C) a reduction in unemployment
D) no change in the natural level of output if the unemployment rate does not change
E) none of the above
Assume that the interest parity holds and that the dollar is expected to depreciate
against the pound. Given this information, we know that
A) U.S. and U.K. interest rates are equal.
B) the U.S. interest rate exceeds the U.K. interest rate.
C) the U.K. interest rate exceeds the U.S. interest rate.
D) individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the
U.K. interest rate.
E) none of the above
Suppose there is a simultaneous reduction in expected future output and reduction in the
future expected interest rate. This will cause which of the following to occur?
A) the IS curve to shift left in the current period
B) the IS curve to shift right in the current period
C) the LM curve to shift up in the current period
D) the LM curve to shift down in the current period
E) an ambiguous effect on the position of the IS curve in the current period
A reasonable dynamic assumption for the IS-LM model is that
A) the economy is always on both the IS and LM curves.
B) the economy is always on the IS curve, but moves only slowly to the LM curve.
C) the economy is always on the LM curve, but moves only slowly to the IS curve.
D) the money market is quick to adjust, but the bond market adjusts more slowly.
E) adjustment to the new IS-LM equilibrium is instantaneous after an LM shift, but not
after an IS shift.
When was the last year that GDP per capita in North Korea was approximately equal to
GDP per capita in South Korea?
A) 1950
B) 1970
C) 1990
D) 2000
E) none of the above
Suppose that the nominal interest rate and expected inflation both decrease by 2%.
Given this information, we would expect which of the following to occur?
A) an increase in the real interest rate
B) a reduction in the real interest rate
C) a reduction in investment
D) an increase in money demand
E) both A and C
Which of the following has occurred for the United States since 1960?
A) The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both
increased.
B) X/Y has increased while IM/Y has decreased.
C) X/Y has decreased and IM/Y has increased.
D) X/Y has decreased and IM/Y has decreased.
A real depreciation will initially cause a reduction in output when which of the
following holds?
A) the Marshall-Lerner condition
B) the J-Curve effect
C) net exports are initially zero
D) net exports are initially negative
E) net exports are initially positive
In a flexible exchange rate regime, an increase in the foreign interest rate (i*) will cause
A) the IP curve to shift to the left/up.
B) the IP curve to shift to the right/down.
C) a movement along the IP curve.
D) neither a shift nor movement along the IP curve.
In an open economy, a reduction in government spending will cause
A) an increase in domestic output.
B) an increase in imports.
C) an increase in net exports.
D) all of the above
E) none of the above
Suppose the stock of capital increases by 2% and employment increases by 2%. Given
this information, we know that
A) output per capita will increase by 6%.
B) output will increase by 4%.
C) output per capita will increase by less than 4% and more than 2%.
D) none of the above
Based on our understanding of the model presented in chapter 11, which of the
following will cause a permanent increase in growth?
A) an increase in education spending
B) an increase in the saving rate
C) an increase in capital accumulation
D) all of the above
E) none of the above
Which of the following represents the domestic demand for goods?
A) C + I + G
B) C + I + G + X
C) C + I + G – IM/ε
D) C + I + G + X – εM/ε
E) C + I + G + X + εIM
Which of the following will cause an increase in the steady-state growth rate of output
per worker?
A) an increase in the saving rate
B) a reduction in the population growth rate
C) a reduction in the rate of depreciation
D) a reduction in the saving rate
E) none of the above
“Animal spirits” refers to
A) the stubborn refusal of many economic decision-makers to use rational expectations.
B) movements in investment that cannot be explained by changes in current variables.
C) the often-observed Fed refusal to cooperate with the government in setting its
monetary policy.
D) the impact of tax-evasion on the budget deficit.
E) an exotic alcoholic drink favored by Wall Street traders.
The flatter is the IS curve,
A) the more effective is monetary policy.
B) the less effective is monetary policy.
C) the effectiveness of monetary policy does not change.
D) a given change in the money supply will have a smaller effect on output.
Suppose workers’ and firms’ expectations of the price level and productivity are
accurate. In this case, an increase in productivity will cause which of the following?
A) an increase in both the real wage and the natural rate of unemployment
B) a decrease in both the real wage and the natural rate of unemployment
C) an increase in the real wage and no change in the natural rate of unemployment
D) a decrease in the real wage and an increase in the natural rate of unemployment
E) none of the above
For this question, assume that the economy is operating in a fixed exchange rate regime
and that perfect capital mobility exists. Given this information, which of the following
will occur?
A) The domestic and foreign interest rates must be equal.
B) The central bank cannot use monetary policy to affect domestic output.
C) An expansionary fiscal policy will require that the central bank increase the money
supply.
D) all of the above
E) none of the above
Which of the following represents the demand for domestic goods?
A) C + I + G
B) C + I + G + X
C) C + I + G – εIM
D) C + I + G + X + εIM
E) C + I + G + X – IM/ε
An increase in the foreign one-year interest rate expected to occur in, say, two years
will, all else fixed, have which of the following effects in a flexible exchange rate
regime?
A) The real exchange rate will decrease with no change in the nominal exchange rate.
B) The nominal exchange rate will decrease with no change in the real exchange rate.
C) Both the real and nominal exchange rate will decrease.
D) No change in either the nominal or real exchange rate.
E) Both the real and nominal exchange rate will increase.
The theories of investment were developed by
A) Friedman and Phelps.
B) Hicks and Hansen.
C) Modigliani and Friedman.
D) Lucas and Sargent.
E) Tobin and Jorgenson.
Which of the following explains why the original Phillips curve relation disappeared or,
as some economists have remarked, “broke down” in the 1970s?
A) Individuals assumed the expected price level for the current year would be equal to
the actual price level from the previous year.
B) Individuals assumed that expected inflation would be zero
C) Individuals changed the way they formed expectations of inflation.
D) Monetary policy became contractionary.
E) More labor contracts became indexed to changes in inflation.
Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y – T G = 2000
a. Given the above variables, calculate the equilibrium level of output.
b. Now, assume that taxes increase from 600 to 700. What is the new equilibrium level
of output? How much does income change as a result of this event? What is the
multiplier for this economy?
Suppose exports are greater than imports. Given this information, we know with
certainty that
A) a trade surplus exists.
B) GNP > GDP.
C) GNP < GDP.
D) the change in business inventories is positive.
Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the
economy is initially operating at the natural level (i.e., Y = Yn). Suppose an increase in
wealth causes households to increase consumption. This wealth-induced increase in
consumption will cause which of the following to occur?
A) The real exchange rate will be permanently higher in the medium run.
B) The real exchange rate will be permanently lower in the medium run.
C) The effects of this devaluation on the real exchange rate will be ambiguous in the
medium run.
D) The real exchange rate will be unchanged in the medium run.
If GDP exceeds GNP, we know with certainty that
A) a budget deficit exists.
B) a trade surplus exists.
C) a trade deficit exists.
D) receipts of factor income from the rest of the world exceed payments of factor
income to the rest of the world.
A nominal depreciation of the Mexican peso (against all currencies) indicates that
A) the peso price of foreign currency has fallen.
B) the Mexican real exchange rate will not change if the price level in Mexico falls.
C) the peso price of, for example, the U.K. pound has increased.
D) the number of units of foreign currency that one can obtain with one peso has
decreased.
Which of the following explains the relatively high growth rate of output in China since
1980?
A) accumulation of capital
B) technological progress
C) a transition from central planning to a market economy
D) all of the above
In 2014, exports as a percentage of GDP for the United States are approximately
A) between 1% and 5%.
B) between 10% and 20%.
C) between 20% and 40%.
D) between 40% and 75%.
E) between 75% and 90%.
A reduction in which of the following variables will cause an increase in the amount of
money individuals wish to hold in the current period?
A) current income
B) the current nominal interest rate
C) the current real interest rate
D) expected future income
E) all of the above
During the late 1990s, Japan experienced reductions in the GDP deflator. Given this
information, we know with certainty that
A) real GDP fell during these periods.
B) real GDP did not change during these periods.
C) the overall price level in Japan decreased during these periods.
D) both real GDP and the overall price level decreased during these periods.
Assume individuals consider only the long run effects of changes in future macro
variables when forming expectations of future output and future interest rates. Suppose
individuals expect future government spending to decrease. Given this information,
individuals will expect
A) a reduction in the expected future interest rate and no change in expected future
output.
B) a reduction in the expected future interest rate and an increase in expected future
output.
C) a reduction in the expected future interest rate and a reduction in expected future
output.
D) a reduction in the expected future interest rate and an ambiguous effect on expected
future output.
Explain the different dimensions of technological progress.
How will the crisis affect the natural rate of unemployment?
What effect does the existence of discouraged workers have on the ability of the official
unemployment rate to provide accurate information about the extent to which labor is
employed?
Explain what a PAYGO rule is.
There are some concerns that technological progress can lead to an increase in
unemployment. Explain the two related but separate dimensions of technological
progress.
Explain how technological change can cause changes in wage inequality.
Explain in detail what effect a reduction in government spending will have on: 1. the
LM curve; and 2. the IS curve.
Explain how the existence of discouraged workers alters the extent to which the official
unemployment provides an accurate measure of the use of labor resources.
What are some of the questions about the macro prudential tools?
Explain the relationship among output, saving, and investment.
What are the three main conclusions that can be drawn from an analysis of growth rates
for developed countries?
Suppose a country’s output is below the policy makers’ desired level of output and is
experiencing a trade surplus. Assume that the policy makers’ goals are to achieve the
desired level of output (i.e., full employment output) and balanced trade. Given this
information, what type of exchange rate and/or fiscal policy can be used to achieve
simultaneously these two goals? Explain.
Explain why in practice policy coordination is hard to achieve.
Explain whether uncertainty should cause policy makers to do more or do less to
stabilize the economy.
What is the difference between saving and savings?
Use the market for central bank money to answer this question. Graphically illustrate
and explain what effect a Federal Reserve purchase of bonds will have on this market
and on the equilibrium interest rate.
Explain what effect an increase in future expected output will have on the IS curve and
LM curve in the current period.
Discuss new classical economics and real business cycle theory.
Explain in detail what effect an increase in government spending will have on: 1. the
LM curve; and 2. the IS curve.
First, explain what the WS relation represents. Second, explain why it has its particular
shape.