Which of the following does not explain the relatively low price inflation compared to
the higher wage inflation in the U.S. during the 1990s?
A) the appreciation of the dollar
B) a reduction in benefits paid to workers
C) an increase in the natural rate of unemployment
D) a reduction in the price of oil
An increase in the interest rate will cause
A) a reduction in the supply of central bank money.
B) a reduction in the demand for currency.
C) a reduction in the demand for reserves.
D) all of the above
E) both B and C
The effect of changes in economic activity on the budget deficit is called
A) fine tuning.
B) debt monetization.
C) the structural deficit.
D) tax smoothing.
E) none of the above
Measures of aggregate output have been published on a regular basis in the United
States since
A) 1947.
B) 1933.
C) 1917.
D) 1946.
The standard of living typically refers to
A) the rate of unemployment.
B) output per capita.
C) wealth per capita.
D) all of the above
Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its leverage ratio
is
A) 4.
B) 5.
C) 10.
D) 9.
In the following production function, Y = f(K, NA), a 20% increase in A will cause
which of the following variables to increase by 20%?
A) labor
B) effective labor
C) output
D) output per worker
E) none of the above
For this question, assume that policy makers are pursuing a fixed exchange rate regime.
Now suppose a budget is passed that calls for a reduction in government spending. This
reduction in government spending will cause which of the following to occur?
A) a reduction in i and an increase in E
B) a reduction in investment
C) no change in output
D) no change in net exports
E) an increase in imports
An increase in the money supply will cause an increase in which of the following
variables?
A) output
B) investment
C) consumption
D) all of the above
E) none of the above
The collapse of the subprime mortgage market increased the spread between Baa and
default-free U.S. Treasury bonds. This is due to
A) a reduction in risk.
B) a reduction in maturity.
C) a flight to quality.
D) a flight to liquidity.
In 1994, Republicans introduced their “Contract with America.” This plan
A) included a PAYGO rule.
B) would restrict the ability of monetary policy to affect the economy in the short run.
C) included a line item veto.
D) would make the Federal Reserve even more independent than it already is.
E) all of the above
An increase in which of the following variables will cause an increase in the user cost
of capital?
A) δ
B) Πt
C) Πe
t
D) all of the above
E) none of the above
For this question, assume that the Fed sets monetary policy according to the Taylor rule.
Suppose current U.S. macroeconomic conditions are represented by the following: π <
π?* and u > un. Given this information, we would expect that the Fed will
A) implement a monetary contraction.
B) implement a monetary expansion.
C) maintain its current stance of monetary policy.
D) more information is need to answer this question.
Deflation generally occurs when which of the following occurs?
A) the consumer price index is greater than the GDP deflator
B) the consumer price index decreases
C) the rate of inflation falls, for example, from 4% to 2%
D) nominal GDP does not change
Based on wage setting behavior, we know that an increase in the unemployment rate
will cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the WS curve.
Suppose individuals expect that interest rates will decrease in the future. Also assume
that the Fed wants to prevent any change in current output. Given this goal of the Fed,
the Fed should implement a policy in the current period that
A) shifts the IS curve rightward.
B) shifts the IS curve leftward.
C) shifts the IS curve leftward and the LM curve upward.
D) shifts the LM curve upward.
E) shifts the LM curve downward.
Assume that an economy experiences both positive population growth and
technological progress. In this economy, which of the following is constant when
balanced growth is achieved?
A) K
B) NA
C) K/N
D) Y/NA
E) none of the above
With a nominal interest rate of 10% per year, the present discounted value of $200 to be
received in two years is
A) $82.64.
B) $90.91.
C) $165.29.
D) $181.82.
E) $220.00.
Assume the Marshall-Lerner condition holds. Which of the following will cause an
increase in net exports?
A) an increase in government spending
B) an increase in investment
C) a reduction in foreign output
D) a reduction in the real exchange rate
E) all of the above
The labor force is defined as
A) the sum of the employed and unemployed.
B) the total number employed.
C) the total number of working age individuals in the population.
D) the sum of the number of employed, unemployed and discouraged individuals.
Suppose policy makers pass a budget that reduces the budget deficit. A deficit reduction
package such as this has a greater chance of increasing current output when
A) the policy is front-loaded.
B) financial markets believe that taxes will not increase in the future.
C) financial markets believe the Fed will lower interest rates in the future.
D) all of the above
E) none of the above
Suppose exports are less than imports. Given this information, we know with certainty
that
A) a trade deficit exists.
B) GNP > GDP.
C) GNP < GDP.
D) the change in business inventories is positive.
Which of the following represents total saving for an economy?
A) the sum of private saving and fixed investment
B) the sum of private saving and consumption
C) the sum of taxes and government spending
D) the excess of taxes over government spending
E) none of the above
Efficiency wage theory suggests that
A) workers will be paid less than their reservation wage.
B) productivity might drop if the wage rate is too low.
C) the government can only set tax rates so high before people will prefer not to work.
D) unskilled workers will have a lower turnover rate than skilled workers.
E) firms will be more resistant to wage increases as the labor market tightens.
Suppose current government spending decreases and that individuals expect future
government spending to decrease. Given this information, in which of the following
cases will output in the current period be more likely to decrease?
A) Individuals consider only the short run effects of changes in future macro variables
when forming expectations of future output and future interest rates.
B) Individuals consider only the medium run effects of changes in future macro
variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long run effects of changes in future macro variables
when forming expectations of future output and future interest rates.
D) The output effects will be the same in B and C.
The existence of the J-curve suggests that a real depreciation will cause
A) an initial increase in net exports.
B) an initial increase in economic activity.
C) a final reduction in net exports.
D) an initial reduction in the demand for domestic goods.
Suppose there are two countries that are identical in every way with the following
exception. Country A is pursuing a fixed exchange rate regime and country B is
pursuing a flexible exchange rate regime. Suppose taxes are increased in both countries
rises by the same amount. Given this information, we know that
A) the change in output in A will be greater than in B.
B) the change in output in B will be greater than in A.
C) the change in output will be the same in both countries.
D) the relative output effects are ambiguous.
The risk that interest payments will not be made, or that the face value of a bond is not
repaid when a bond matures is
A) interest rate risk.
B) inflation risk.
C) liquidity risk.
D) default risk.
For this question, assume that the production function exhibits the same characteristics
as those presented in the textbook. Based on these characteristics (i.e., assumptions),
successive and equal increases in capital per worker will cause which of the following
to occur?
A) Output per worker will decline.
B) Output per worker will not change.
C) Output per worker will increase by a constant amount.
D) Output per worker will increase by a larger amount.
E) none of the above
Which of the following countries had the highest level of output per capita in 1950?
A) United States
B) France
C) Japan
D) United Kingdom
The Phillips curve shows that when the unemployment rate is lower than the natural
rate,
A) inflation is higher than expected.
B) inflation is lower than expected.
C) policy rate is higher than expected.
D) policy rate is lower than expected.
Which of the following was one of the main rules in the 1990 “Budget Enforcement
Act”?
A) flat tax rate
B) PAYGO rule
C) indexation of income tax brackets
D) consumption tax
E) none of the above
Research for a number of OECD countries suggests that inflation will be lower
A) the more independent the central bank.
B) the less independent the central bank.
C) if the heads of central banks are chosen by election.
D) when the terms of the heads of central banks coincide with the terms of elected
officials.
Euro coins and bank notes were introduced in January
A) 2002.
B) 2001.
C) 2000.
D) 1999.
Changes in GDP in the medium run are determined primarily by
A) demand factors.
B) supply factors.
C) monetary policy.
D) all of the above
Explain why the U.S. crisis became a world crisis.
Assume a country is in a fixed exchange rate regime. Explain what factors might cause
individuals to expect that a country will revalue its currency.
Explain what effect an increase in the future expected interest rate will have on the IS
curve and LM curve in the current period.
What is the IS relation? Explain why IS curve is downward sloping.
Explain what factors cause changes in output in: 1. the short run; 2. medium run; and 3.
long run.
Explain what effect each of the following events will have on the IS curve in a flexible
exchange rate regime: 1. an increase in foreign output; 2. a reduction in the foreign
interest rate; and 3. an increase in the domestic interest rate.
Graphically illustrate (using the WS and PS relations) and explain the effects of an
increase in the markup on the equilibrium real wage, the natural rate of unemployment,
the natural level of employment, and the natural level of output.
Explain the menu cost explanation of output fluctuations.
Suppose the domestic and foreign interest rates are both initially equal to 4%. Now
suppose the foreign interest rate rises to 6%. Explain what effect this will have on the
exchange rate. Also explain what must occur for the interest parity condition to be
restored.
Explain how the financial crisis turned into a major economic crisis.
Explain what the term structure of interest rates represents.
Briefly explain what effect a reduction in the saving rate will have on growth.
Why would consumer decrease consumption even if their disposable income has not
changed?
Discuss and explain what effect a reduction in the marginal propensity to consume has
on the size of the multiplier.
Graphically illustrate the effects of an increase in autonomous consumption on the
demand line (ZZ) and Y. Clearly indicate in your graph the initial and final equilibrium
levels of output. Briefly explain why this increase in output is greater than (in absolute
terms) the initial change in autonomous consumption.
What is the money multiplier and what factors determine its size?
Based on your understanding of the Phillips curve, explain what happens to actual
inflation (relative to expected inflation) when the actual unemployment rate is either
above or below the natural rate of unemployment.