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Assume that a firm wants to build a factory that will cost $5 million. It believes that it
can get a return of $600,000 in one year and then can sell the used factory for its
original cost. The rate of return on this investment would be:
A) 6 percent.
B) 12 percent.
C) 18 percent.
D) 30 percent.
Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002
and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges
were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was:
A) $5.
B) $6.50.
C) $9.50.
D) $11.
In the case of an unanticipated inflation:
A) creditors with an unindexed contract are hurt because they get less than they
expected in real terms.
B) creditors with an indexed contract gain because they get more than they contracted
for in nominal terms.
C) debtors with an unindexed contract do not gain because they pay exactly what they
contracted for in nominal terms.
D) debtors with an indexed contract are hurt because they pay more than they
contracted for in nominal terms.
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 cuts taxes, holding other factors
constant?
A) Point A
B) Point B
C) Point C
D) Point D
If an economy is in a steady state with no population growth or technological change
and the capital stock is above the Golden Rule level and the saving rate falls:
A) output, consumption, investment, and depreciation will all decrease.
B) output and investment will decrease, and consumption and depreciation will
increase.
C) output and investment will decrease, and consumption and depreciation will increase
and then decrease but finally approach levels above their initial state.
D) output, investment, and depreciation will decrease, and consumption will increase
and then decrease but finally approach a level above its initial state.
Which of the following is the best example of a flexible price?
A) the price of a cup of coffee in a coffee shop
B) the price of gasoline at a service station
C) the price of a ticket at a movie theater
D) the price of a book in a bookstore
A normal good is a good that:
A) provides pleasure.
B) would generally be owned by an average household.
C) has a value greater than zero.
D) is desired in larger quantities by a consumer when his or her income rises.
When the capital stock reaches a steady state, the:
A) marginal product of capital must exceed the real cost of capital.
B) marginal product of capital must equal the real cost of capital.
C) real cost of capital must exceed the marginal product of capital.
D) real cost of capital must exceed the real rental price of capital.
Exhibit: Shifting IS* and LM*
(Exhibit: Shifting IS* and LM*) A small open economy with a floating exchange rate is
initially in equilibrium at A with
Holding all else constant, if the government imposes a tariff on imports in order
to protect domestic jobs, then the _____ curve will shift to _____.
A) LM1*;
B) LM1*;
C) IS1*;
D) IS1*;
In the Solow growth model, an economy in the steady state with a population growth
rate of n but no technological growth will exhibit a growth rate of output per worker at
rate:
A) 0.
B) n.
C) d.
D) (n + d).
In a small open economy a decrease in the exchange rate will _____ net exports and
shift the _____ curve.
A) increase; IS
B) decrease; IS
C) increase; LM
D) decrease; LM
Prior to the financial crisis of 2008"2009, financial regulation in the United States
consisted of a _____ system of regulators, which the Dodd-Frank Act sought to
improve upon by _____ the number of regulatory bodies.
A) coordinated; increasing
B) coordinated; decreasing
C) fragmented; increasing
D) fragmented; decreasing
a. As an economy moves into a recession, income falls. Illustrate graphically the impact
of a decrease in income on the equilibrium interest rate using the theory of liquidity
preference and the market for real money balances. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the
terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the fall
in income.
Diversification allows savers to largely eliminate:
A) risk aversion.
B) idiosyncratic risk.
C) systematic risk.
D) risk premiums.
The change in capital stock per worker (Dk) may be expressed as a function of s = the
saving ratio, f(k) = output per worker, k = capital per worker, and d = the depreciation
rate, by the equation:
A) Dk = sf(k)/dk.
B) Dk = sf(k) × dk.
C) Dk = sf(k) + dk.
D) Dk = sf(k) " dk.
GNP equals GDP ______ income earned domestically by foreigners ______ income
that nationals earn abroad.
A) plus; plus
B) minus; minus
C) minus; plus
D) plus; minus
The natural rate of unemployment is:
A) the average rate of unemployment around which the economy fluctuates.
B) about 10 percent of the labor force.
C) a rate that never changes.
D) the transition of individuals between employment and unemployment.
In the Solow growth model, capital exhibits ______ returns. In the basic endogenous
growth model, capital exhibits ______ returns.
A) constant; diminishing
B) constant; constant
C) diminishing; constant
D) diminishing; diminishing
The short run refers to a period:
A) of several days.
B) during which prices are sticky and unemployment may occur.
C) during which capital and labor are fully employed.
D) during which there are no fluctuations.
Exhibit: Rental Price of Capital
(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in
equilibrium at A with real rental price R3/P and capital stock K2, then holding other
factors constant, an improvement in technology that increases the marginal productivity
of capital will move:
A) the demand curve from D2 to D1.
B) the demand curve from D2 to D3.
C) the supply of capital from K2 to K1.
D) the supply of capital from K2 to K3.
Which of the following characteristics made the 2008"2009 recession differ most
sharply from previous recessions?
A) a large spike in the duration of unemployment
B) a large increase in teenage unemployment
C) higher rates of female unemployment than rates of male unemployment
D) an increase in the rate of job separation and a decrease in the rate of job finding
In prisoner of war camps during World War II, the "currency" used was:
A) chocolates.
B) cigarettes.
C) gold.
D) IOUs.
All of the following statements about minimum-wage workers in the United States are
correct except:
A) minimum-wage workers are more likely to be male.
B) minimum-wage workers are more likely to work part time.
C) minimum-wage workers are more likely to be less educated.
D) minimum-wage workers are more likely to be young.
The life-cycle model assumes that consumers use saving and borrowing to ______
consumption over their life cycle.
A) increase
B) decrease
C) smooth
D) vary
According to Kremer, large populations:
A) require the capital stock to be spread thinly, thereby reducing living standards.
B) place great strains on an economy's productive resources, resulting in perpetual
poverty.
C) are a prerequisite for technological advances and higher living standards.
D) are not a factor in determining living standards.
In a short-run model of a large open economy with a floating exchange rate, a monetary
expansion causes a decrease in the interest rate and:
A) the exchange rate but has no effect on income.
B) the exchange rate, and increases in income, net capital outflow, and net exports.
C) the exchange rate and net capital outflow, and increases in income and net exports.
D) net exports and net capital outflow, but increases in investment and income.
If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and
the price level (P) along the vertical axis, using the quantity theory of money as a
theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it
moves farther to the right.
A) downward; steeper
B) downward; flatter
C) upward; steeper
D) upward; flatter
Exhibit: IS*"LM* and AD
(Exhibit: IS*"LM* and AD)A small open economy with a floating exchange rate is
initially in equilibrium at A with
Holding all else constant, if the domestic price level increases, then the _____
curve will shift to _____.
A) LM1*;
B) LM1*;
C) IS1*;
D) IS1*;
The construction of a new apartment building is an example of:
A) business fixed investment.
B) residential investment.
C) inventory investment.
D) financial investment.
When the phrase _____ was coined, it referred to _____.
A) "too big to fail"; JPMorgan and Bank One
B) "one bank, one country"; Bank of America
C) "laissez-faire"; the Federal Reserve
D) "too big to fail"; Continental Illinois Bank
