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Policy is conducted by rule if policymakers:
A) announce in advance how policy will respond to various situations and commit
themselves to following through on this announcement.
B) are free to size up the situation case by case and choose whatever policy seems
appropriate at the time.
C) set policy according to election results, i.e., set policy by rule of the ballot box.
D) manipulate policy to ensure both low inflation and unemployment on election day.
If there is a fixed-exchange-rate system, then in the short run described by the
Mundell"Fleming model:
A) the nominal exchange rate is fixed, but the real exchange rate is free to vary.
B) the real exchange rate is fixed, but the nominal exchange rate is free to vary.
C) both the nominal and real exchange rates are fixed.
D) the nominal exchange rate is fixed, but whether the real exchange rate is fixed
depends on whether the central bank follows a rule of constant growth of the money
supply.
Economic data suggest that when income is expected to fall by $1, consumption falls
by:
A) $1.
B) $0.50.
C) the marginal propensity to consume.
D) the ratio of years until retirement to the years remaining of life
A small country might want to use the money of a large country rather than print its
own money if the small country:
A) is likely to be unstable, whereas the large country is likely to be stable.
B) is likely to be stable, whereas the large country is likely to be unstable.
C) needs the revenue for seigniorage.
D) wants to control its own inflation rate.
If the national saving rate increases, the:
A) economy will grow at a faster rate forever.
B) capital"labor ratio will increase forever.
C) economy will grow at a faster rate until a new, higher, steady-state capital"labor ratio
is reached.
D) capital"labor ratio will eventually decline.
According to the life-cycle model, when wealth is constant in the short run, the average
propensity to consume ______ as income increases.
A) increases
B) decreases
C) remains constant
D) can either increase or decrease
Ownership claims by shareholders in a firm are called:
A) stocks.
B) bonds.
C) leverage.
D) debt.
Monetary policy rules that target nominal variables would target any of the following
except the:
A) price level.
B) money supply
C) unemployment rate.
D) level of nominal GDP.
The Great Depression in the United States:
A) probably was caused by a rightward shift in the LM curve because the price level fell
more rapidly than the fall in the money supply from 1929 to 1933.
B) cannot be attributed to a fall in the money supply because the money supply did not
fall.
C) probably cannot be considered to have started because of a leftward shift in the LM
curve because real balances did not fall between 1929 and 1931.
D) probably was caused by a leftward shift in the LM curve because interest rates
remained high between 1929 and 1933.
If the monetary base fell and the currency"deposit ratio rose but the reserve"deposit
ratio remained the same, then:
A) the money supply would fall, but not by as much as it would have fallen if the
reserve"deposit ratio had risen.
B) the money supply would fall, but not by as much as it would have fallen if the
reserve"deposit ratio had fallen.
C) the money supply would fall more than it would have fallen if the reserve"deposit
ratio had risen.
D) it is impossible to be certain whether the money supply would fall or rise in this
case.
In the Solow growth model with population growth, but no technological change, a
higher level of steady-state output per worker can be obtained by all of the following
except:
A) increasing the saving rate.
B) decreasing the depreciation rate.
C) increasing the population growth rate.
D) increasing the capital per worker ratio.
All of the following U.S. federal agencies are directly concerned with macroeconomic
policy except the:
A) Council of Economic Advisers.
B) Congressional Budget Office.
C) Federal Reserve.
D) Department of Health and Human Services.
If banks fear failure and become more conservative in making loans, then the sharp
decline in bank lending is called a credit:
A) crunch.
B) hazard.
C) bubble.
D) swap.
The most frequently used tool of monetary policy is:
A) open-market operations.
B) changes in the discount rate.
C) changes in reserve requirements.
D) changes in interest rate paid on reserves
The efficiency of labor is a term that does not reflect the:
A) high output that comes from labor cooperating with a large amount of capital.
B) health of the labor force.
C) education of the labor force.
D) skills of the labor force acquired through on-the-job training.
The CPI is determined by computing:
A) an average of prices of all goods and services.
B) the price of a basket of goods and services that changes every year, relative to the
same basket in a base year.
C) the price of a fixed basket of goods and services, relative to the price of the same
basket in a base year.
D) nominal GDP relative to real GDP.
Which of the following hypotheses is consistent with fewer hours worked per year in
Europe than in the United States?
A) fewer mandated holidays in Europe than in the United States
B) higher employment-to-population ratios in Europe than in the United States
C) higher tax rates in Europe than in the United States
D) a smaller underground economy in Europe than in the United States
Imputed values included in GDP are the:
A) market prices of goods and services.
B) estimated value of goods and services that are not sold in the marketplace.
C) price of goods and services measured in constant prices.
D) price of goods and services measured in current prices.
In the Keynesian-cross analysis, if the consumption function is given by C = 100 +
0.6(Y " T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:
A) 350.
B) 400.
C) 600.
D) 750.
If the demand for real money balances does not depend on the interest rate, then the LM
curve:
A) slopes up to the right.
B) slopes down to the right.
C) is horizontal.
D) is vertical.
When bond traders for the Federal Reserve seek to increase interest rates, they ______
bonds, which shifts the ______ curve to the left.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM
According to the traditional view of government debt, if taxes are cut without cutting
government spending, then the long-run effects will be ______ steady-state capital and
______ consumption.
A) higher; higher
B) lower; lower
C) higher; lower
D) lower; higher
If a neutral technological advance improves the production function, the neoclassical
theory of distribution predicts:
A) the real wage will rise and the real rental price of capital will fall.
B) both the real wage and the real rental price of capital will fall.
C) both the real wage and the real rental price of capital will rise.
D) the real wage will fall and the real rental price of capital will rise.
In the Solow growth model with population growth but no technological progress,
increases in capital have a positive impact on steady-state consumption per worker by
_____, but have a negative impact on steady-state consumption per worker by _____.
A) increasing the capital to worker ratio; reducing saving in the steady state.
B) reducing investment required in the steady state; increasing saving in the steady
state.
C) increasing output; increasing output required to replace depreciating capital.
D) decreasing the saving rate; increasing the depreciation rate.
If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and
the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:
A) 1.
B) 2.
C) 4.
D) 9.
Suppose that the International Monetary Fund (IMF) is concerned about currency
depreciation in a small open economy.
a. What type of fiscal policy should the IMF propose to the government of the small
open economy to generate a currency appreciation?
b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the
small open economy.
c. What will happen to the trade balance of the small open economy, assuming that it
started from a position of balanced trade?
To illustrate inflation inertia in an aggregate demand"aggregate supply model, the
short-run aggregate supply curve shifts upward because of increases in ______, and the
aggregate demand curve shifts upward because of increases in ______.
A) the expected price level; the money supply
B) the money supply; the expected price level
C) output; the price level
D) the price level; output
The Solow residual measures the portion of output growth that cannot be explained by
growth in:
A) capital and labor.
B) technology.
C) the money supply.
D) the saving rate.
The time-inconsistency problem in discretionary policymaking about unemployment
and inflation can be effectively avoided when the:
A) policymaker has and is known to have an extremely strong preference for very low
inflation.
B) policymaker does not care about the rate of inflation and simply sets policy to avoid
unemployment.
C) private agents in the economy are not "rational."
D) policymaker has more information than do the private agents in the economy.
The government purchasing ownership stakes in a faltering financial institution in order
to prop up the financial system is an example of:
A) a giveaway of public funds.
B) risky lending.
C) a capital injection.
D) conventional monetary policy.
The "impossible trinity" refers to the idea that a country can simultaneously pursue only
two of the three following policies: free international-capital flows, monetary policy for
domestic stabilization, and a fixed exchange rate. For each of the following
combinations indicate what the economy gives up by selecting the combination and
why the omitted policy cannot be achieved:
a. a fixed exchange rate and free international-capital flows
b. a monetary policy for domestic stabilization and a fixed exchange rate
c. a monetary policy for domestic stabilization and free international-capital flows
The right of seigniorage is the right to:
A) levy taxes on the public.
B) borrow money from the public.
C) draft citizens into the armed forces.
D) print money.
