Alan Blinder’s survey of firms found that the typical firm adjusts its prices:
A) more than once a week.
B) about once a month.
C) once or twice a year.
D) less than once a year.
The tax multiplier indicates how much ______ change(s) in response to a $1 change in
taxes.
A) the budget deficit
B) consumption
C) income
D) real balances
When exports exceed imports, all of the following are true except:
A) net capital outflows are positive.
B) net exports are positive.
C) domestic investment exceeds domestic saving.
D) domestic output exceeds domestic spending.
If the per-worker production function is given by y =k1/2, the saving ratio is 0.3, 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.
In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, “When
people have more money, they can spend it on goods and services.”
a. In the IS”LM model, will a tax cut change the money supply in the economy? Does a
change in the money supply shift the IS or the LM curve?
b. In the IS”LM model, does a tax cut shift the IS or the LM curve?
c. Based on your answers in a and b, how can you reconcile the president’s statement
with economics? Can you suggest how his statement could be modified to be consistent
with the IS”LM model?
The Ricardian view on fiscal policy makes less sense if people are:
A) rational and practice foresight.
B) shortsighted and not fully rational.
C) able to plan for the future.
D) able to borrow without constraint.
To determine whether an economy is operating at its Golden Rule level of capital stock,
a policymaker must determine the steady-state saving rate that produces the:
A) largest MPK.
B) smallest depreciation rate.
C) largest consumption per worker.
D) largest output per worker.
If the demand for money increases, this will:
A) increase velocity.
B) decrease velocity.
C) have no effect on velocity.
D) cause the Fed to increase the money supply.
The monetary transmission mechanism works through the effects of changes in the
money supply on:
A) the budget deficit.
B) investment.
C) government expenditures.
D) taxation.
Precautionary saving is saving for:
A) retirement, when income falls.
B) unpredictable expenses.
C) bequests to benefit children.
D) repayment of debt previously incurred.
Measures of average workweeks and of supplier deliveries (vendor performance) are
included in the index of leading indicators, because shorter workweeks tend to indicate
______ future economic activity and slower deliveries tend to indicate ______ future
economic activity.
A) stronger; stronger
B) stronger; weaker
C) weaker; stronger
D) weaker; weaker
The inside lag is the time:
A) before automatic stabilizers respond to economic activity.
B) after automatic stabilizers respond to economic activity.
C) between a shock to the economy and the policy action responding to the shock.
D) between a policy action and its influence on the economy.
An arrangement by which a central bank holds enough foreign currency to back each
unit of the domestic currency is called a:
A) floating exchange rate.
B) dollarization.
C) monetization.
D) currency board.
In the United Kingdom between 1730 and 1920, during wartime, government spending
tended to increase:
A) but the interest rate did not increase.
B) and the interest rate also increased.
C) but the interest rate decreased.
D) and the interest rate remained constant.
Assume that the monetary base (B) is $100 billion, the reserve”deposit ratio (rr) is 0.1,
and the currency”deposit ratio (cr) is 0.1.
a. What is the money supply?
b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply?
c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?
Which of the following would decrease the real exchange rate in a small open economy
in the long run?
A) a personal income tax cut
B) a reduction in government spending
C) a tariff on imports
D) an increase in investment
If bread is produced by using a constant returns to scale production function, then if the:
A) number of workers is doubled, twice as much bread will be produced.
B) amount of equipment is doubled, twice as much bread will be produced.
C) amounts of equipment and workers are both doubled, twice as much bread will be
produced.
D) amounts of equipment and workers are both doubled, four times as much bread will
be produced.
The idea that the natural rate of unemployment is increased following extended periods
of unemployment is called:
A) Okun’s law.
B) the cold-turkey approach.
C) the natural-rate hypothesis.
D) hysteresis.
If the equation for a country’s Phillips curve is p = 0.02 ” 0.8(u ” 0.05), where p is the
rate of inflation and u is the unemployment rate, what is the short-run inflation rate
when unemployment is 4 percent (0.04)?
A) above 2 percent (0.02)
B) below 2 percent (0.02)
C) 2 percent (0.02)
D) “2 percent (“0.02)
Assume that there is a short-run tradeoff between inflation and unemployment, that the
central bank desires both low inflation and low unemployment, and that the central
bank follows a fixed rule in conducting monetary policy. Initially, households and firms
expect high inflation. Following a credible announcement by the central bank of a
low-inflation policy, households and firms will ______ the central bank’s announcement
and ______ their expectations of inflation.
A) believe; lower
B) not believe; not change
C) believe; not change
D) not believe; lower
Consider two countries: Flexiland and Stuckland. The labor force in each country
consists of 100,000 workers. In Flexiland a different 500 workers are unemployed each
month. In Stuckland the same 500 workers are unemployed for the entire year. Compare
and contrast the unemployment situation in the two countries by explaining:
a. the unemployment rate,
b. the number of spells of unemployment,
c. the average duration of each unemployment spell, and
d. whether the unemployment is more likely to be frictional or structural.
Assume that a country experiences a reduction in productivity that shifts the labor
demand curve downward and to the left. If the labor market were always in equilibrium,
this would lead to:
A) a lower real wage and a rise in unemployment.
B) a lower real wage and no change in unemployment.
C) a lower real wage and less unemployment.
D) no change in real wage or in unemployment.
Earlier retirement in Europe than in the United States contributes to:
A) higher employment-to-population ratios in Europe than in the United States.
B) lower employment-to-population ratios in Europe than in the United States.
C) more hours worked per year by the average employed person in Europe than the
average employed person in the United States.
D) fewer hours worked per year by the average employed person in Europe than the
average employed person in the United States.
A binding borrowing constraint will ______ the potency of an announced future tax cut
to influence aggregate demand but will ______ the potency of a temporary tax cut.
A) not affect; increase
B) increase; not affect
C) decrease; increase
D) increase; decrease
Assume that a country’s production function is Y = AK0.3L0.7. The ratio of capital to
output is 3, the growth rate of output is 3 percent, and the depreciation rate is 4 percent.
Capital is paid its marginal product.
a. What is the marginal product of capital in this situation? (Hint: The marginal product
of capital may be computed using calculus by differentiating the production function
and using the capital”output ratio or by using the fact that capital’s share equals MPK
multiplied by K divided by Y.)
b. If the economy is in a steady state, what must be the saving rate? (Hint: The saving
rate multiplied by Y must provide for gross growth of (d + n + g)K, where d is the
depreciation rate.)
c. If the economy decides to achieve the Golden Rule level of capital and actually
reaches it, what will be the marginal product of capital?
d. What must the saving rate be to achieve the Golden Rule level of capital?
Holding other factors constant, the ratio of government debt to GDP can decrease as a
result of any of the following changes except:
A) decreases in government spending.
B) increases in GDP.
C) decreases in tax revenues.
D) decreases in transfer payments.
If income velocity is assumed to be constant, but no other assumptions are made, the
level of ______ is determined by M.
A) prices
B) income
C) transactions
D) nominal GDP
During the era of the gold standard, the price of gold in England:
A) was always equal to the price of gold in the United States.
B) was always a little higher than the price of gold in the United States, but it could not
be higher by more than the cost of transporting gold from the United States to England.
C) was always a little lower than the price of gold in the United States, but it could not
be lower than the cost of transporting gold from England to the United States.
D) could be higher or lower than the price of gold in the United States, but not by more
than the cost of transporting gold between the two countries.
In Irving Fisher’s two-period model, if the consumer is initially borrowing in period one
and the real interest rate rises, first-period consumption will:
A) certainly rise.
B) certainly fall.
C) remain constant.
D) either rise or fall.
If the demand function for money is M/P = 0.5Y ” 100r, then the slope of the LM curve
is:
A) 0.001.
B) 0.005.
C) 0.01.
D) 0.05.