According to the Keynesian-cross analysis, when there is a shift upward in the
government-purchases schedule by an amount DG and the planned expenditure
schedule by an equal amount, then equilibrium income rises by:
A) one unit.
B) DG.
C) DG divided by the quantity one minus the marginal propensity to consume.
D) DG multiplied by the quantity one plus the marginal propensity to consume.
A severe recession is called a(n):
A) depression.
B) deflation.
C) exogenous event.
D) market-clearing assumption.
In a steady state:
A) no hiring or firings are occurring.
B) the number of people finding jobs equals the number of people losing jobs.
C) the number of people finding jobs exceeds the number of people losing jobs.
D) the number of people losing jobs exceeds the number of people finding jobs.
The rational-expectations point of view, in the most extreme case, holds that if
policymakers are credibly committed to reducing inflation, and rational people
understand that commitment and quickly lower their inflation expectations, then the
sacrifice ratio will be approximately:
A) 5.
B) 2.8.
C) 1.
D) 0.
In the Solow growth model, with a given production function, depreciation rate, saving
rate, and no technological change, higher rates of population growth produce:
A) higher steady-state ratios of capital per worker.
B) higher steady-state growth rates of output per worker.
C) higher steady-state growth rates of total output.
D) higher steady-state levels of output per worker.
Demand-pull inflation is the result of:
A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.
If the reserve”deposit ratio is less than one, and the monetary base increases by $1
million, then the money supply will:
A) increase by $1 million.
B) decrease by $1 million.
C) increase by more than $1 million.
D) decrease by more than $1 million.
The hyperinflation experienced by interwar Germany illustrates how fiscal policy can
be connected to monetary policy when government expenditures are financed by:
A) new taxes.
B) borrowing in the open market.
C) printing large quantities of money.
D) selling gold.
Open-market operations are:
A) Commerce Department efforts to open foreign markets to international trade.
B) Federal Reserve purchases and sales of government bonds.
C) Securities and Exchange Commission rules requiring open disclosure of market
trades.
D) Treasury Department purchases and sales of the U.S. gold stock.
Two economies are identical except that the level of capital per worker is higher in
Highland than in Lowland. The production functions in both economies exhibit
diminishing marginal product of capital. An extra unit of capital per worker increases
output per worker:
A) more in Highland.
B) more in Lowland.
C) by the same amount in Highland and Lowland.
D) in Highland, but not in Lowland.
Starting from long-run equilibrium, an increase in aggregate demand increases ______
in the short run, but only increases ______ in the long run.
A) output; prices
B) prices; output
C) short-run aggregate supply; long-run aggregate supply
D) the money supply; the natural rate of output
Economic statistics are not perfect. Explain at least one way in which each of the
following statistics as currently calculated in the United States fails to completely or
accurately measure the corresponding economic concept (in parentheses):
a. real GDP per person (economic well-being);
b. CPI (cost of living);
c. unemployment rate (involuntary unemployment).
Policies to substantially reduce the natural rate of unemployment should be targeted at:
A) the short-term unemployed.
B) the long-term unemployed
C) discouraged workers.
D) insiders and outsiders.
Empirical investigations into whether differences in income per person are the result of
differences in the quantities of the factors of production available or differences in the
efficiency with which the factors are employed typically find:
A) a negative correlation between the quantity of factors and the efficiency of use.
B) a positive correlation between the quantity of factors and the efficiency of use.
C) no correlation between the quantity of factors and the efficiency of use.
D) large gaps between the quantity of factors accumulated and the efficiency of use.
In a small open economy, if domestic saving exceeds domestic investment, then the
extra saving will be used to:
A) make loans to the domestic government.
B) make loans to foreigners.
C) repay the national debt.
D) repay loans to the Federal Reserve.
Whether workers must “opt into” or “opt out of” a retirement savings plan ______ make
a difference if workers are rational optimizers and ______ make a difference if workers’
behavior exhibits inertia.
A) would; would
B) would not; would not
C) would; would not
D) would not; would
The behavior of consumers spreading increases in income earned in one period into
increases in consumption over several periods is known as:
A) random-walk consumption.
B) transitory consumption.
C) consumption smoothing.
D) the income effect.
The real cost of capital is the:
A) purchase price of a unit of capital divided by the price level.
B) purchase price of a unit of capital minus the rate of inflation.
C) cost of a unit of capital less the marginal product of capital.
D) cost of buying and renting out a unit of capital measured in units of the economy’s
output.
An economy’s ______ equals its ______.
A) consumption; income
B) consumption; expenditure on goods and services
C) expenditure on goods; expenditures on services
D) total income; total expenditure on goods and services
All of the following are types of macroeconomics data except the:
A) price of an IBM computer.
B) growth rate of real GDP.
C) inflation rate.
D) unemployment rate.
In a steady state with population growth and technological progress:
A) the capital share of income increases.
B) the labor share of income increases.
C) the capital share of income, in some cases, increases, and sometimes the labor share
increases.
D) the capital and labor shares of income are constant.
In a small open economy, when the government reduces national saving, the
equilibrium real exchange rate:
A) rises and net exports fall.
B) rises and net exports rise.
C) falls and net exports fall.
D) falls and net exports rise.
The largest component of national income is:
A) corporate profits.
B) compensation of employees.
C) proprietors’ income.
D) net interest.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, in the period in which a positive supply shock occurs, output _____
and inflation _____.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
In the Mundell”Fleming model on a Y ” e graph, the curves labeled IS* and LM* are
labeled that way as a reminder that:
A) the price level is held constant at the world price level p*.
B) the interest rate is held constant at the world interest rate r*.
C) the exchange rate is held constant at the world exchange rate e*.
D) output is held constant at the full employment level.
Assume that in a certain economy the LM curve is given by Y = 2,000r ” 2,000 +
2(M/P) + u, where u is a shock that is equal to +200 half the time and “200 half the
time, and the IS curve is given by Y = 8,000 ” 2,000r. The price level (P) is fixed at 1.0.
The natural rate of output is 4,000. The government wants to keep output as close as
possible to 4,000 and does not care about anything else. Consider the following two
policy rules: i. Set the money supply M equal to 1,000 and keep it there. ii. Manipulate
M from day to day to keep the interest rate constant at 2 percent.
a. Under rule i, what will Y be when u = +200? Under rule i, what will Y be when u =
“200?
b. Under rule ii, what will Y be when u = +200? Under rule ii, what will Y be when u =
“200?
c. Which rule will keep output closer to 4,000?
One efficiency-wage theory implies that firms pay high wages because:
A) this practice increases the problem of moral hazard.
B) in wealthy countries, it is important to pay workers high wages to improve their
health.
C) the more a firm pays its workers, the greater their incentive to stay with the firm.
D) paying high wages promotes adverse selection.
Empirical evidence finds that the average propensity to consume is falling:
A) for only the short-run consumption function.
B) for only the long-run consumption function.
C) for both the short-run and the long-run consumption functions.
D) for neither the short-run nor the long-run consumption functions.
The price level decreases and output increases in the transition from the short run to the
long run when the short-run equilibrium is _____ the natural rate of output in the short
run.
A) above
B) below
C) equal to
D) either above or below
Assume you are a 25-year old who expects to work for 40 years and then enjoy 30 years
of retirement. (Assume a discount rate of 3 percent.) If you behave according to the
life-cycle/permanent income hypothesis, how would your current consumption change
if:
a. You win $1,000,000 in the lottery this year.
b. You expect to get a $1,000,000 ‘signing bonus” when you get a job next year.
The intersection of the IS and LM curve determines the values of:
A) r, Y, and P, given G, T, and M.
B) r, Y, and M, given G, T, and P.
C) r and Y, given G, T, M, and P.
D) p and Y, given G, T, and M.
The profit rate of a firm that rents capital is equal to:
A) the marginal product of capital minus the cost of capital.
B) the cost of capital minus the marginal product of capital.
C) zero.
D) a negative number, if it is adding to its capital stock.
The panel of economists appointed by the Senate Finance Committee estimated that the
CPI ______ inflation by approximately ______ percentage point(s) per year.
A) overestimates; 1
B) overestimates; 10
C) underestimates; 1
D) underestimates; 10