If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T
decreases by 100, then the IS curve for any given interest rate shifts to the right by:
A) 100.
B) 200.
C) 300.
D) 400.
Using a market-clearing model to analyze the demand for haircuts is ______ because
the price of a haircut usually changes ______.
A) realistic; frequently
B) realistic; infrequently
C) unrealistic; frequently
D) unrealistic; infrequently
Which of the following would be evidence that a country with a fixed exchange rate has
an undervalued currency?
A) The government has a budget surplus.
B) The government has a budget deficit.
C) The central bank’s foreign-currency reserves are increasing.
D) The central bank’s foreign-currency reserves are decreasing.
As Secretary of the Treasury, Alexander Hamilton opposed the time-inconsistent policy
of:
A) repaying the debt.
B) raising taxes.
C) repudiating the debt.
D) reducing taxes.
______ is a share of ownership in a corporation, and the ______ market is the market
where these shares are traded.
A) Capital; capital
B) A dividend; stock
C) A bond; capital
D) Stock; stock
A graph of the rate of inflation in the United States over the twentieth century shows:
A) an overall upward trend interrupted by a large downturn in the 1930s.
B) some periods of deflation in the first half of the century, but only positive rates of
inflation in the second half of the century.
C) a relatively steady, positive level throughout the century except for deflation in the
1930s.
D) a constant rate of inflation in the first half of the century followed by an upward
trend in the second half.
If real money balances enter the IS“LM model both through the theory of liquidity
preference and the Pigou effect, then a fall in the price level will shift:
A) only the LM curve.
B) only the IS curve.
C) both the LM and the IS curves.
D) neither the LM nor the IS curve.
An example of decreasing returns to scale is when capital and labor inputs:
A) both increase 10 percent and output increases 5 percent.
B) both increase 10 percent and output increases 10 percent.
C) both increase 5 percent and output increases 10 percent.
D) do not change and output increases 5 percent.
Which of the following is an exogenous variable in the dynamic model of aggregate
demand and aggregate supply?
A) Etpt + 1, expected inflation
B) rt, real interest rate
C) pt, inflation
D) ut, supply shock
The equilibrium condition in the Keynesian-cross analysis in a closed economy is:
A) income equals consumption plus investment plus government spending.
B) planned expenditure equals consumption plus planned investment plus government
spending.
C) actual expenditure equals planned expenditure.
D) actual saving equals actual investment.
A consumption function shows the relationship between consumption and:
A) income.
B) personal income.
C) disposable income.
D) taxes.
According to the theory of Ricardian equivalence, tax cuts combined with no plans to
reduce government spending ______ public saving and ______ private saving.
A) reduce; reduce
B) reduce; increase
C) increase; increase
D) increase; reduce
The inflation tax is paid:
A) only by the central bank.
B) by all holders of money.
C) only by government bond holders.
D) equally by every household.
a. In September 1995, Patrick Buchanan, a Republican candidate for president,
proposed a 10 percent tariff on Japanese imports to the United States, a 20 percent tariff
on Chinese imports to the United States, and an unspecified ‘social” tariff on imports
from third-world countries. Use the long-run model of a small open economy to
illustrate graphically the impact of these trade policies on the U.S. exchange rate and
the trade balance. Assume that the country starts from a position of trade balance, i.e.,
exports equal imports. Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium values; iv. the direction the curves shift; and v. the new long-run
equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of Mr. Buchanan’s
proposed policies. Specifically state what happens to the exchange rate, the trade
balance, the volume of imports, and the volume of exports.
The introduction of a stylish new line of Toyotas, which makes some consumers prefer
foreign cars over domestic cars, will, according to the Mundell”Fleming model with
floating exchange rates, lead to:
A) a fall in income and net exports.
B) no change in income or net exports.
C) a fall in income but no change in net exports.
D) no change in income but a fall in net exports.
In Irving Fisher’s two-period model, if the consumer is initially a saver and the interest
rate and first-period consumption increase, then we can conclude that the income effect:
A) was greater than the substitution effect.
B) was less than the substitution effect.
C) exactly offset the substitution effect.
D) and the substitution both increased consumption.
The transactions velocity of money indicates the _____ in a given period, while the
income velocity of money indicates the _____ in a given period.
A) number of transactions; amount of income earned
B) quantity of money used for transactions; quantity of money paid as income
C) number of times a dollar bill changes hands; number of times a dollar bill enters
someone’s income
D) volume of transactions; flow of income
Assume that the economy starts from long-run equilibrium. If the Federal Reserve
increases the money supply, then ______ increase(s) in the short run and ______
increase(s) in the long run.
A) prices; output
B) output; prices
C) output; output
D) prices; prices
Conducting fiscal policy so that G = T + b (u ” un), where G is government
expenditures, T is tax revenue, u is the unemployment rate, un is the natural rate of
unemployment, and b is a positive number, is an example of a(n):
A) active rule.
B) passive rule.
C) discretionary policy.
D) automatic stabilizer.
Exhibit: Market for Real Money Balances
(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels
of interest rates and real money balances are:
A) r1 and M1/P1
B) r2 and M2/P2
C) r3 and M2/P2
D) r3 and M3/P3
Monetary neutrality is a characteristic of the aggregate demand”aggregate supply model
in:
A) both the short run and the long run.
B) in neither the short run nor the long run.
C) in the short run, but not in the long run.
D) in the long run, but not in the short run.
The theory behind Tobin’s q indicates that:
A) the stock market may be expected to predict every turning point in real GDP.
B) the stock market may be expected to be closely tied to fluctuations in output and
employment.
C) every time investment goes up we would expect the stock market to go down.
D) the stock market and the economy are basically independent of each other.
In equilibrium, other things being equal, all of the following changes will increase the
real rental price of capital except:
A) a lower quantity of labor employed.
B) a lower stock of capital.
C) better technology.
D) a higher labor”capital ratio.
A central bank that chooses a small value of qp, the responsiveness of nominal interest
rates to inflation, and a large 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
In a large open economy, the real interest rate is determined by:
A) national saving, the domestic investment function, and the net capital outflow
function.
B) national saving, the domestic investment function, and the net exports function.
C) the domestic investment function, the net capital outflow function, and the net
exports function.
D) national saving, the domestic investment function, the net capital outflow function,
and the net exports function.
Exhibit: IS”LM Fiscal Policy
(Exhibit: IS“LM Fiscal Policy) Based on the graph, starting from equilibrium at interest
rate r1 and income Y1, an increase in government spending would generate the new
equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
An increase in the price of goods bought by firms and the government will show up in:
A) the CPI but not in the GDP deflator.
B) the GDP deflator but not in the CPI.
C) both the CPI and the GDP deflator.
D) neither the CPI nor the GDP deflator.
In the Mundell”Fleming model with a fixed exchange rate, a rise in the world interest
rate will lead income:
A) and net exports both to fall.
B) to fall while net exports are unchanged.
C) to be unchanged and net exports to fall.
D) and net exports to both be unchanged.
An important factor in the evolution of commodity money to fiat money is:
A) a desire to reduce transaction costs.
B) a desire to increase transaction costs.
C) the fact that gold is no longer highly valued.
D) a desire to use gold for jewelry.
Assume that a war reduces a country’s labor force but does not directly affect its capital
stock. Then the immediate impact will be that:
A) total output will fall, but output per worker will rise.
B) total output will rise, but output per worker will fall.
C) both total output and output per worker will fall.
D) both total output and output per worker will rise.
Inflation inertia refers to the idea that inflation:
A) is always present in economies.
B) keeps on going unless something acts to stop it.
C) cannot be reduced unless unemployment is increased.
D) can be generated by either demand-pull or cost-push forces.
Central-bank independence refers to:
A) whether central banks pursue monetary policy by rules or discretion.
B) the situation that occurs when the inside lag of monetary policy is not related to the
outside lag.
C) the extent to which automatic stabilizers are relied on to cushion economic volatility.
D) the degree of separation between central-bank decision making and political
influence.
What was the effect of the recession of 2008-2009 on output and prices? Give one
example of conventional monetary policies and fiscal policies used by the government
to fix the problem.
What is an endogenous growth model? How is technological change determined in the
two-sector endogenous model?
There are systematic risks and idiosyncratic risks. Which risks can be mitigated by
whom and how?
What is stagflation? How does it occur as an effect of shock to aggregate supply curve?
Compare and contrast the impact of a faster rate of population growth on the standard
of living (output per worker) in the models by Solow, Malthus, and Kremer.
What is balanced growth? Give an example.
What is Ricardian equivalence? Give at least three reasons why Ricardian equivalence
might not correctly describe an economy.
What is the effect of investment enhancement measures on the trade balance of a small
open economy?
Use the neoclassical model of business fixed investment to illustrate graphically how a
plague that kills a large proportion of the labor force would change the rental price of
capital. If other factors remained unchanged, how would this change the quantity of
investment in the economy?
The above diagram shows how a rise in government expenditure (G) shifts the IS curve
from IS1 to IS2. What are the levels of investments in Y1 and Y2?
What is the shape of the short-run supply curve? Explain.
Explain at least three factors that will affect the quantity of reserves that a bank wishes
to hold.
Assume that planned expenditure consists of consumption, investment, and government
expenditures only. Further, assume that consumption C= c(Y ” tY), where tY denotes
taxes as a function of income. Calculate the equilibrium level of Y and the government
expenditure multiplier.
Graphically illustrate how house prices and residential investment were affected by
lowered lending standards that allowed many people with less than perfect credit
(subprime borrowers), who had previously been unable to obtain mortgages, to
purchase houses.
Compare two procedures for conducting monetary policy:
Method 1: Maintain a steady money growth of 6 percent per annum, and
Method 2: Maintain a steady inflation rate of 3 percent per annum.
Be sure to consider whether the methods involve: (1) active or passive monetary policy
and (2) rules or discretion. Discuss why one method might be preferred over the other.
How does a change in fiscal policy bring changes in the IS curve in a short-run
equilibrium?
How does population growth help explain why some countries are poor and some are
rich?