According to the permanent-income hypothesis, consumption depends primarily on
______ income.
A) current
B) nominal
C) permanent
D) transitory
To make a trade in a barter economy requires:
A) currency.
B) a check.
C) scrip.
D) a double coincidence of wants.
According to the Fisher effect, the nominal interest rate moves one-for-one with
changes in the:
A) inflation rate.
B) expected inflation rate.
C) ex ante real interest rate.
D) ex post real interest rate.
In the relationship expressed in functional form, Y = G(K, L), Y stands for real GDP, K
stands for the amount of capital in the economy, and L stands for the amount of labor in
the economy. In this case G( ):
A) is the growth rate of real GDP when the amount of capital and labor in the economy
is fixed.
B) indicates that the variables inside the parentheses are endogenous variables in the
model.
C) is the symbol that stands for government input into the production process.
D) is the function telling how the variables in the parentheses determine real GDP.
Assume that an economy is governed by the Phillips curve p = pe ” 0.5(u ” 0.06), where
p = (P ” P“1)/P“1, pe = (pe ” P“1)/P“1, and 0.06 is the natural rate of unemployment.
Further assume pe = p“1. Suppose that, in period zero, p = 0.03 and pe = 0.03that is, that
the economy is experiencing steady inflation at a 3-percent rate.
a. Now assume that the government decides to impose whatever demand is necessary to
cut unemployment to 0.04. Suppose the government follows this policy for periods 1
through 5. Create a table of p and pe for these five periods.
b. Assume that, for periods 6 through 10, the government decides to hold
unemployment at 0.06. Create another table of p and pe for these five periods. Is there
any reason to expect the inflation rate to go back to 0.03?
c. If the government persisted in its behavior under part a, do you think the public
would continue for long forming expectations according to pe = p“1? Why?
A central bank that chooses a large value of qp, the responsiveness of nominal interest
rates to inflation, and a small value of qY, the responsiveness of nominal interest rates
to output, is choosing to obtain less _____ at the expense of more _____.
A) inflation; output
B) output; inflation
C) inflation variability; output variability
D) output variability; inflation variability
Because of the way that U.S. tax law defines depreciation, depreciation for tax purposes
is:
A) always less than true economic depreciation.
B) always greater than true economic depreciation.
C) always equal to true economic depreciation.
D) sometimes greater than true economic depreciation and sometimes less.
In examining the impact of fiscal policy, it is assumed that:
A) consumption, investment, and the interest rate are endogenous variables.
B) consumption, investment, and the interest rate are exogenous variables.
C) government purchases, taxes, and interest rates are endogenous variables.
D) government purchases, taxes, and interest rates are exogenous variables.
If a consumer is in a position in which a borrowing constraint limits his or her current
consumption and a one-time tax is levied on his or her current income, then the tax will:
A) lower the consumer’s future consumption.
B) not affect the consumer’s future consumption.
C) increase the consumer’s future consumption.
D) have no effect on either current or future consumption.
If wage rigidity holds the real wage above the equilibrium level, an increase in the
demand for labor will ______ the number unemployed.
A) increase
B) decrease
C) not change
D) possibly increase, decrease, or leave unchanged
Assume that an increase in consumer confidence raises consumers’ expectations of
future income and thus the amount they want to consume today for any given income.
This shift, in a neoclassical economy, will:
A) lower investment and raise the interest rate.
B) raise investment and lower the interest rate.
C) lower both investment and the interest rate.
D) raise both investment and the interest rate.
Because monetary and fiscal lags are long and variable:
A) stronger policies must be used.
B) successful stabilization policy is completely impossible.
C) attempts to stabilize the economy are often destabilizing.
D) policy must be completely passive.
The quantitative easing policy conducted by the Federal Reserve between 2007 and
2011 resulted in a large increase in the monetary base that was partially offset by:
A) a significant increase in the reserve”deposit ratio.
B) a significant decrease in the reserve”deposit ratio.
C) open-market purchases.
D) open-market sales.
Although real variables such as unemployment and real GDP are the best measures of
economic performance, most economists do not advocate manipulating money supply
directly to hit a real target because:
A) they believe a constant growth rate of the money supply is the best way to stabilize
real GDP or unemployment.
B) if the Fed chose a target that was not natural output or the natural unemployment
rate, the result would be accelerating inflation or deflation.
C) if the Fed chose a target for the unemployment rate above the natural rate, the result
would be accelerating inflation.
D) if the Fed chose a target for the unemployment rate below the natural rate, the result
would be accelerating deflation.
In Irving Fisher’s two-period model, if consumption in both periods is a normal good,
then an increase in income in period two:
A) increases consumption in period one only.
B) increases consumption in period two only.
C) increases consumption in both periods.
D) does not increase consumption in either period.
If Congress passed a tax increase at the request of the president to reduce the budget
deficit, but the Fed held the money supply constant, then the two policies together
would generally lead to ______ income and a ______ interest rate.
A) lower; lower
B) lower; higher
C) no change in; lower
D) no change in; higher
A supply shock does not occur when:
A) a drought destroys crops.
B) unions push wages up.
C) the Fed increases the money supply.
D) an oil cartel increases world oil prices.
Equity financing is obtaining funds for a business by:
A) borrowing.
B) issuing ownership shares.
C) seigniorage.
D) government subsidy
Residential investment equals the:
A) stock of existing housing.
B) flow of new housing.
C) demand for housing.
D) imputed rent from housing.
The production function for an economy can be expressed as Y = F(K,L), where Y is
real GDP, K is the quantity of capital in the economy, and L is the quantity of labor in
the economy.
a. If F( ) = 100 + 3K + 9L, what is real GDP if the quantity of capital is 200 and the
quantity of labor is 500?
b. What is/are the endogenous variable(s) in this model?
c. What is/are the exogenous variable(s) in this model?
If the consumption function is given by C = 150 + 0.85(Y ” T) and T increases by 1 unit,
then savings:
A) decreases by 0.85 units.
B) decreases by 0.15 units.
C) increases by 0.15 units.
D) increases by 0.85 units.
Throughout much of the 1990s, the United States experienced declining energy prices.
Assume that the U.S. economy was in long-run equilibrium before these declines
began.
a. Use the aggregate demand”aggregate supply model to illustrate graphically the
short-run and long-run impact of this decline on output and prices.
b. If the Federal Reserve attempted to offset this deviation from the natural rate in the
short run, should the money supply be increased or decreased?
Tax smoothing is a desirable policy because it:
A) reduces the distortions of incentives caused by taxes.
B) reduces budget deficits in periods of recession.
C) eliminates the impact of automatic stabilizers.
D) is consistent with a balanced budget.
Computer models of the economy:
A) usually consist of only a few equations.
B) require no assumptions about monetary and fiscal policy.
C) require assumptions about monetary and fiscal policy.
D) give excellent predictions regardless of assumptions about monetary and fiscal
policy.
The Phillips curve expresses a short-run link:
A) among nominal variables.
B) among real variables.
C) among unexpected variables.
D) between nominal and real variables.
Exhibit: IS”LM Monetary Policy
(Exhibit: IS“LM Monetary Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, an increase in the money supply would generate the new
equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
According to Franco Modigliani’s life-cycle hypothesis, the principal determinant(s) of
consumption is (are):
A) permanent income.
B) income and wealth.
C) transitory income.
D) wealth.
Macroeconomics does not try to answer the question of:
A) why do some countries experience rapid growth.
B) what is the rate of return on education.
C) why do some countries have high rates of inflation.
D) what causes recessions and depressions.
If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits
(cr) is constant and the monetary base (B) is constant, then:
A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.
An increase in taxes shifts the IS curve, drawn with income along the horizontal axis
and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
The amount of capital that banks are required to hold depends on the:
A) amount of deposits held at a bank.
B) riskiness of the bank’s assets.
C) reserve requirements set by the Fed.
D) level of deposit insurance coverage.
If a country has a higher unionization rate, will that lead to a higher unemployment rate
also?
After studying the circular flow of dollars in the economy, explain with an example
how saving done by households goes back into the circular flow. In reality, does all
saving go back as an investment?
Give an example of an economic policy that the government, after announcing the
economic policy, will be tempted to renege.
In the Mundell-Fleming model, what does the following equation denote?
Y= C (Y– T) + I (r*) + G + NX (E)
M/P = L (r*,Y)
“The baby boomer generation is responsible for pushing the U.S. economy into more
debt.” Is this statement true or false? Give reasons supporting your answer.
How is demand-pull inflation different from cost-push inflation?
Suppose a government has a tax revenue shortfall. Will hyperinflation inevitably follow
unless the government cuts in its fiscal expenditures?
In times of great economic uncertainty and potential job loss, many consumers may
increase their saving as a precautionary measure. What is the predicted impact of an
increase in national saving on the domestic interest rate and exchange rate in a large
open economy, holding other factors constant? Illustrate your answer graphically and
explain in words.
The LM curve can shift to the right if there is an increase in the supply of money or a
fall in the price level. In which case is this movement along the aggregate demand
curve, and in which case is this a shift of the aggregate demand curve? Explain.
“GDP deflator is a better price level indicator than CPI.” Give reasons both supporting
and opposing the statement.
What determines the real exchange rate and what determines the nominal exchange rate
in a small open economy with perfect capital mobility, fully employed factors of
production, and flexible prices?
The housing industry frequently complains that restrictive monetary policy adversely
affects their industry more than other industries. Use the model of residential
investment to illustrate graphically the impact of restrictive monetary policy on housing
prices and the quantity of residential investment. Also explain your answer in words.
Every government in the world tries to avoid financial crisis. Similarly, every economist
is also trying to find a foolproof way to remove the word “financial crisis” from the
dictionary. What makes financial crisis so undesirable? Explain.
If paying efficiency wages higher than market-level should always be a problem for
employers, then how is paying efficiency wages helpful for employers?
What is the efficiency of labor”? How does technological progress effect efficiency of
labor?
Who fixes the quantity of real money balances in closed and open economies? In a
small open economy, the interest rate R is determined by what rate?
The Federal Reserve wants to increase the money supply by printing and distributing 1
million dollars worth of currency notes. What will be the actual increase in money
supply if the public holds one fourth of the currency as cash, and deposits rest of the
money in banks that hold 5 percent of their deposits as reserves?
What are shocks? How do shocks respond to the IS and LM curves?