In a small open economy with a floating exchange rate, the supply of real money
balances is fixed and a rise in government spending:
A) raises the interest rate, so that income must rise to maintain equilibrium in the
money market.
B) raises the interest rate so that net exports must fall to maintain equilibrium in the
goods market.
C) cannot change the interest rate so that net exports must fall to maintain equilibrium
in the goods market.
D) cannot change the interest rate so income must rise to maintain equilibrium in the
money market.
In a Solow model with technological change, if population grows at a 2 percent rate and
the efficiency of labor grows at a 3 percent rate, then in the steady state, output per
actual worker grows at a ______ percent rate.
A) 0
B) 2
C) 3
D) 5
Hyperinflations typically occur when governments:
A) attempt to keep the unemployment rate below the natural rate.
B) finance spending with the inflation tax.
C) set inflation targets too high.
D) use discretionary monetary policy to stabilize output.
In a small open economy, if the world interest rate increases, then the supply of
domestic currency on the foreign exchange market will _____ and the real exchange
rate will _____, holding all else constant.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
The inflation rate in the United States averaged about:
A) nearly zero between 1900 and 1950.
B) nearly zero between 1950 and 2000.
C) 10 percent between 1900 and 1950.
D) 10 percent between 1950 and 2000.
If a graph is drawn with net exports on the horizontal axis and the real exchange rate on
the vertical axis, then the real exchange rate is determined by the intersection of the
______ net-exports schedule and the ______ line representing saving minus investment.
A) downward-sloping; vertical
B) upward-sloping; vertical
C) downward-sloping; upward-sloping
D) upward-sloping; downward-sloping
The Fisher two-period model shows that current consumption depends on:
A) only current income.
B) only future income.
C) current income, future income, and the interest rate.
D) current income, future income, the interest rate, and the rate of inflation.
In an economic model:
A) exogenous variables and endogenous variables are both fixed when they enter the
model.
B) endogenous variables and exogenous variables are both determined within the
model.
C) endogenous variables affect exogenous variables.
D) exogenous variables affect endogenous variables.
The risk that imperfectly monitored agents will act in dishonest or otherwise
inappropriate ways is called:
A) adverse selection.
B) moral hazard.
C) systematic risk.
D) risk aversion.
In the two-sector endogenous growth model, income growth persists because:
A) the production function shifts exogenously.
B) the saving rate exceeds the rate of depreciation.
C) the creation of knowledge in universities never slows down.
D) the fraction of the labor force in universities is large.
When drawn with the interest rate on the vertical axis and income on the horizontal
axis, the IS curve will be steeper the:
A) larger the level of government spending.
B) smaller the level of government spending.
C) greater the sensitivity of investment spending to the interest rate.
D) smaller the sensitivity of investment spending to the interest rate.
Estimates by Goldin and Katz indicate that the financial returns of a year of college
_____ between 1980 and 2005.
A) increased.
B) decreased.
C) did not change.
D) were negative.
Investment per worker (i) as a function of the saving ratio (s) and output per worker
(f(k)) may be expressed as:
A) s +f(k).
B) s ” f(k).
C) sf(k).
D) s/f(k).
It rains so much in the country of Tropicana that capital equipment rusts out
(depreciates) at a much faster rate than it does in the country of Sahara. If the countries
are otherwise identical, in which country will the Golden Rule level of capital per
worker be higher? Illustrate graphically.
When factor supply is fixed and quantity of the factor is graphed on the horizontal axis
while factor price is graphed on the vertical axis, the factor:
A) supply curve is horizontal.
B) supply curve is vertical.
C) supply curve slopes up to the right.
D) demand curve slopes up to the right.
To the extent that the undervaluation of the riskiness of mortgage-backed securities
contributed to the financial crisis of 2008″2009, blame for this mistake lies with:
A) mortgage brokers.
B) investment banks.
C) rating agencies.
D) government policymakers.
Both Keynesians and supply-siders believe a tax cut will lead to growth:
A) and both agree it works through incentive effects.
B) but Keynesians believe it works through incentive effects whereas supply-siders
believe it works through aggregate demand.
C) but Keynesians believe it works through aggregate demand whereas supply-siders
believe it works through incentive effects.
D) and both agree it works through aggregate demand.
The short-run equilibrium in the dynamic model of aggregate demand and supply
determines the:
A) inflation rate and inflation target.
B) real interest rate and natural level of output.
C) level of output and inflation rate.
D) natural level of output and level of output.
According to the neoclassical theory of distribution, if firms are competitive and subject
to constant returns to scale, total income in the economy is distributed:
A) only to the labor used in production.
B) partly between labor and capital used in production, with the surplus going to the
owners of the firm as profits.
C) equally between the labor and capital used in production.
D) between the labor and capital used in production, according to their marginal
productivities.
Exhibit: Saving, Investment, and the Interest Rate 1
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in
equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals
desired investment, I1. What will be the new equilibrium combination of real interest
rate, saving, and investment if the government raises taxes, holding other factors
constant?
A) Point A
B) Point B
C) Point C
D) Point D
In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a
bank, then the money supply:
A) increases by $100.
B) decreases by $100.
C) increases by more than $100.
D) remains the same.
In year 1, capital stock was 6, labor input was 3, and output was 12. In year 2, capital
was 7, labor was 4, and output was 14. If shares of labor and capital were each 1/2,
between the two years, total factor productivity:
A) increased by 1/12.
B) increased by 1/18.
C) decreased by 1/12.
D) decreased by 1/18.
The concerns of economists who favor passive over active policy are most closely
associated with their:
A) preference for using monetary policy rather than fiscal policy for stabilization.
B) view that policy made by rules is superior to policy made by discretion.
C) belief that shocks to modern economies are not large enough to require any policy
response.
D) doubt that the correct policy will be implemented at the correct time.
Conditional convergence occurs when economies converge to:
A) the same steady state as other economies.
B) the Golden Rule steady state.
C) the balanced-growth steady state.
D) their own, individual steady states.
As the U.S. economy approached the millennium, January 1, 2000, many people
cautiously began to hold larger than normal quantities of currency as protection against
a possible disruption of banking services that could result from computer glitches.
a. How did this greater preference for currency affect the money supply?
b. How could the Federal Reserve offset such an increase in currency preferences?
Into which of the three categoriesemployed, unemployed, out of the labor forcewould
an interviewer for the Current Population Survey place each of the following people?
Explain.
a. Jennifer Temple is working as a second-grade schoolteacher.
b. Frank Peabody is attending college full-time to earn a degree in elementary
education.
c. Martin Hampton is working as a high school social science teacher but is at home
sick with the flu.
d. Kyle Brown does not currently have a job. He wants to be an elementary-school
teacher. He has the appropriate degree. He has not looked for a position in the last
month because he doesn’t believe schools are currently hiring.
e. Brenda Dewey does not currently have a job. She has sent her resume to several
school districts in the past week in hope of finding a teaching position.
If the government of a small open economy wishes to reduce a trade deficit, which
policy action will be successful in achieving this goal?
A) increasing taxes
B) increasing government spending
C) increasing investment tax credits
D) imposing protectionist trade policies
How will a decrease in output during a recession affect:
a. business fixed investment?
b. residential investment?
c. inventory investment?
Graphically illustrate the traditional view of the short-run impacts of a debt-financed
tax cut on:
a. interest rates and output in a closed economy in the short run, using the IS”LM
model.
b. exchange rates and output in a small open economy with a flexible exchange rate in
the short run, using the Mundell”Fleming model.
According to the classical theory of money, reducing inflation will not make workers
richer because firms will increase product prices ______ each year and give workers
______ raises.
A) more; larger
B) more; smaller
C) less; larger
D) less; smaller
The time between a shock to the economy and the policy action responding to that
shock is called the:
A) automatic stabilizer.
B) time inconsistency of policy.
C) inside lag.
D) outside lag.
The long-run and short-run aggregate supply curves reflect fundamental differences
between long-run and short-run macroeconomic analysis.
a. Graphically illustrate the long-run and short-run aggregate supply curves. Be sure to
label the axes.
b. What determines the level of output in the long run versus the short run?
c. How do prices behave differently in the long run and the short run?
Government transfer payments:
A) are included as part of government purchases, G.
B) can be viewed as negative tax payments, T.
C) are received as payment for inputs in the factor market.
D) do not affect the level of public or private saving.
The demand for real money balances is generally assumed to:
A) be exogenous.
B) be constant.
C) increase as real income increases.
D) decrease as real income increases.
Explain why a decrease in planned investment, which is a change in the goods market,
will upset the equilibrium in the money market.
During a recession, consumers may want to save more to provide themselves with a
reserve to cushion possible job losses. Use the Keynesian model to describe the impact
of an exogenous decrease in consumption (a decrease in C) on the equilibrium level of
income in the economy. Will aggregate national saving increase?
“GDP as a measurement unit of economic well-being has a flaw which is removed by
imputations.” Explain with an example.
Suppose people in an economy reduce their saving. What will be the effect on real
interest rate and investment?
How does population growth affect the steady state?
In which situation will an increase in money supply have no effect on equilibrium
effect?
Larger quantities of steady-state capital have both a positive and negative effect on
consumption per worker in the Solow model (assume no population growth or
technological progress). Explain.
Use the aggregate demand”aggregate supply model to graphically illustrate the impact
of a financial crisis on output and prices in an economy in the short run. Explain the
factors that cause changes from the initial equilibrium to the new short-run equilibrium.
A falling investment function yields a falling IS curve, but a falling demand for real
money balance curve yields a rising LM curve. Why?
What is meant by the phrase “consumption smoothing” and why is it a key element of
the life-cycle hypothesis and the permanent-income hypothesis?
Policymakers are contemplating undertaking either an increase in government spending
or an increase in the money supply. Either policy is forecast to have the same impact on
income in the short run. Use the IS“LM model to compare the impact on consumption
and investment of the two policy alternatives.
Index bonds have a very low interest rate but still are considered a good option for
investment. Why is this so?
Fill in the blanks: As a dynamic response to supply shock in the short-run, the DAS
curve shifts (say in period t) ___________ while the DAD curve ___________, causing
inflation to ___________ and output to _____________.
What is the relationship between unemployment and real GDP? Explain Okun’s law.
Suppose that the Federal Reserve raises the interest rate at which the average household
can borrow and lend. Assume that the typical household behaves according to Irving
Fisher’s two-period model, that consumption in both periods is a normal good, and that
households are initially borrowers. Illustrate graphically how the increase in the interest
rate in period one affects consumption in both periods.