The consumption decisions of individuals are not important for the:
A) determination of the steady-state capital stock.
B) determination of fiscal-policy multipliers.
C) determination of aggregate demand.
D) determination of sticky prices.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, in the first period of a four-period positive demand shock, output
_____ and inflation _____.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
The following notice appeared on a full page of the Wall Street Journal on February 9,
2009:
“There is no disagreement that we need action by our government, a recovery plan that
will help to jumpstart the economy.” President-Elect Barack Obama, January 9, 2009
With all due respect Mr. President, that is not true. Notwithstanding reports that all
economists are now Keynesians and that we all support a big increase in the burden of
government, we the undersigned do not believe that more government spending is a
way to improve economic performance. More government spending by Hoover and
Roosevelt did not pull the United States out of the Great Depression in the 1930s. More
government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a
triumph of hope over experience to believe that more government spending will help
the United States today. To improve the economy, policymakers should focus on
reforms that remove impediments to work, saving, investment and production. Lower
tax rates and a reduction in the burden of government are the best ways of using fiscal
policy to boost growth.
The statement was signed by over 200 economists, including 3 Nobel Laureates.
a. Comment on the extent to which the disagreement between the President and the
economists involves a disagreement about whether policy should be passive or active.
b. Identify the rationale(s) used to support the economists’ position.
The existence of financing constraints makes investment:
A) more sensitive to current conditions.
B) less sensitive to current conditions.
C) spending follow a random walk.
D) spending increase during recessions.
In 2013 in the United States, the approximate amount of GDP (in current dollars) that
was spent on consumption per person was:
A) $36,400.
B) $53,100.
C) $8, 400
D) $16,800.
According to the Mundell”Fleming model for a small open economy with flexible
exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in
the money supply could still influence aggregate income through changes in the:
A) exchange rate.
B) price level.
C) level of government spending.
D) tax rates.
The potential problem faced by the rest of Europe in the event of a Greek debt default
is:
A) the inability of the European Central Bank to conduct open market operations.
B) the risk of banks holding Greek debt becoming insolvent.
C) an increase in the number of U.S. dollars traded per euro in the foreign exchange
market.
D) the strain on the European banking system, while banks in the rest of the world
would be unaffected.
Differences in unemployment rates across demographic groups are most closely
correlated with differences in:
A) job-finding rates.
B) job-separation rates.
C) unionization rates.
D) efficiency wage rates.
The large increase in U.S. government debt between 1980 and 1995 was unusual
because it occurred:
A) during peacetime.
B) during an extended recessionary period.
C) without increased government spending.
D) without tax cuts.
Which of the following is an example of a fiscal policy that has no inside lag?
A) a decrease in income tax rates
B) an ongoing unemployment insurance program
C) an increase in government spending for job training
D) a reduction in the age at which people become eligible for retirement benefits
In the IS“LM model, the impact of an increase in government purchases in the goods
market has ramifications in the money market, because the increase in income causes
a(n) ______ in money ______.
A) increase; supply
B) increase; demand
C) decrease; supply
D) decrease; demand
If saving exceeds investment demand, and consumption is not a function of the interest
rate:
A) the demand for loans exceeds the supply of loans.
B) the interest rate will fall.
C) the interest rate will rise.
D) saving will fall.
a. Suppose a government moves to reduce a budget deficit. Using the long-run model of
the economy developed in Chapter 3, graphically illustrate the impact of reducing a
government’s budget deficit by increasing (lump-sum) taxes on household income. Be
sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction
curves shift; and v. the terminal equilibrium values.
b. State in words what happens to: i. the real interest rate; ii. national saving; iii.
investment; iv. consumption; and v. output.
If the per-worker production function is y = Ak, where A is a positive constant, then the
marginal product of capital:
A) increases as k increases.
B) is constant as k increases.
C) decreases as k increases.
D) cannot be measured in this case.
The theoretical separation of real and monetary variables is called:
A) the classical dichotomy.
B) monetary neutrality.
C) the Fisher effect.
D) the quantity theory of money.
The recent worldwide slowdown in economic growth began in the early:
A) 1960s.
B) 1970s.
C) 1980s.
D) 1990s.
If the number of employed increases while the number of unemployed does not change,
the unemployment rate:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.
Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate
supply when:
A) dynamic aggregate demand equals dynamic aggregate supply.
B) there are no shocks and inflation is stable.
C) the demand shock equals the supply shock.
D) the nominal interest rate equals the real interest rate.
An unexpected deflation can change demand by redistributing wealth from:
A) creditors to debtors, thus raising consumption.
B) creditors to debtors, thus lowering consumption.
C) debtors to creditors, thus lowering consumption.
D) debtors to creditors, thus raising consumption.
In the U.S. economy today, real GDP per person, compared with its level in 1900, is
about:
A) 50 percent higher.
B) twice as high.
C) three times as high.
D) eight times as high.
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the
short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve
is Y = 2(M/P) and M = 1,500.
a. If the economy is initially in long-run equilibrium, what are the values of P and Y?
b. What is the velocity of money in this case?
c. Suppose because banks start paying interest on checking accounts, the aggregate
demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?
d. What is the velocity of money in this case?
e. With the new aggregate demand function, once the economy adjusts to long-run
equilibrium, what are P and Y?
f. What is the velocity now?
A spell of unemployment begins when a person leaves his or her job or:
A) withdraws from the labor force.
B) enters the labor force.
C) takes a vacation.
D) has been without a job for at least four weeks.
If policymakers announce in advance how policy will respond to various situations and
commit themselves to following through on this announcement, this is:
A) policy by rule.
B) policy by discretion.
C) time inconsistent policy.
D) monetary policy.
The total income of everyone in the economy adjusted for the level of base year prices
is called:
A) a recession.
B) an inflation.
C) real GDP.
D) a business fluctuation.
Milton Friedman viewed current income as the sum of permanent income and:
A) bonus income.
B) transitory income.
C) temporary income.
D) surprise income.
Assume that a country’s per-worker production is y = k1/2, where y is output per worker
and k is capital per worker. Assume also that 10 percent of capital depreciates per year
(= 0.10).
a. If the saving rate (s) is 0.4, what are capital per worker, production per worker, and
consumption per worker in the steady state? (Hint: Use sy = dk and y = k1/2 to get an
equation in s, d, k, and k1/2, and then solve for k.)
b. Solve for steady-state capital per worker, production per worker, and consumption
per worker with s = 0.6.
c. Solve for steady-state capital per worker, production per worker, and consumption
per worker with s = 0.8.
d. Is it possible to save too much? Why?
What is the effect of the following on the money supply?
a. Increase in currency-deposit ratio, keeping all other things constant
b. Decrease in reserve-deposit ratio, keeping all other things constant
If an economy is in a steady state with a saving rate below the Golden Rule level,
efforts to increase the saving rate result in:
A) both higher per-capita output and higher per-capita depreciation, but the increase in
per-capita output would be greater.
B) both higher per-capita output and higher per-capita depreciation, but the increase in
per-capita depreciation would be greater.
C) higher per-capita output and lower per-capita depreciation.
D) lower per-capita output and higher per-capita depreciation.
Empirical evidence finds that the average propensity to consume is constant:
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 household survey conducted by the Bureau of Labor Statistics provides estimates
of the number of workers ______, while the establishment survey provides estimates of
the number of workers ______.
A) self-employed; unemployed
B) unemployed; self-employed
C) with jobs; on firms’ payrolls
D) on firms’ payrolls; with jobs
In recent U.S. experience, inflation has:
A) been persistent from year to year, whereas in the nineteenth century inflation had
little persistence.
B) been persistent from year to year, and this was also true in the nineteenth century.
C) not been persistent from year to year, although it was persistent in the nineteenth
century.
D) not been persistent from year to year, and the same was true in the nineteenth
century.
If domestic saving exceeds domestic investment, then net exports are ______ and net
capital outflows are ______.
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive
How does the AD-AS curve analyze the long run growth of an economy? Explain.
What are the two main ingredients and assumptions of the Solow model?
In 2015, John buys a factory built in 2009 and constructs a new storage house within
the premises. The transaction of buying the factory is not counted in the GDP, but the
construction of the storage house in the same factory is counted in GDP. Why?
Give at least two reasons why a decline in stock prices might lead to a slowdown in
economic activity. Be sure to connect your reasons to economic models.
“Economic policies have potential to provide politicians with the justification theories
to defend their own agendas.” Does this statement imply that politicians always use
economics to satisfy their individual agendas?
Countries seeking to adopt the euro as their currency must meet certain criteria,
including the requirements to keep their government budget deficit equal to 3 percent or
less of GDP, and to hold government debt levels below 60 percent of GDP. Discuss why
there are fiscal policy criteria for joining a monetary union.
Are the terms “market clearing” and “equilibrium” one and the same? Explain.
A classical economist wears a T-shirt printed with the slogan “Fast Money Raises My
Interest!” Use the quantity theory of money and the Fisher equation to explain the
slogan.
War is the generator of debt burden for countries. How does war generate debt for a
country?
Ken Downing behaves according to Irving Fisher’s two-period model. Consumption in
both periods is a normal good for Ken. Ken is initially a saver in period one. Ken loses
his job in period one. His first-period income becomes his unemployment benefits,
which are much lower than his period-one income had been. His expected income in
period two is unchanged. Illustrate graphically how this job loss affects Ken’s
consumption in periods one and two.
Assume an economy where the consumption function is defined asC= CC + cY, and the
investment function is defined as I= ir, where Y is total income and r is the interest rate.
What does the slope of the IS curve depend on?
Give two examples of macroeconomic variables and microeconomic variables.
Use the model of dynamic aggregate demand and aggregate supply to compare the time
paths of output and inflation in response to a one-period positive demand shock versus
a one-period positive supply shock.
Construct a bank balance sheet with the following items: reserves, deposits, loans,
securities, capital, and debt. Choose values so that the reserve”deposit ratio is 10
percent and the leverage ratio is Give an example of a change in asset values that would
push bank capital to zero. What happens when bank capital is gone?
The Solow model with population growth and labor-augmenting technological progress
predicts balanced growth in the steady state. Growth rates of which variables are
predicted to be balanced (i.e., will be equal) in the steady state?
You are presented with the following equation: (1 +r )= (1 +i )/(1 +π). Expand the
expression to solve fori. What assumption is required for this expression to be equal to
the Fischer equation?
Since 1960 there has been a substantial increase in unemployment rates in major
European countries. Give two reasons for this happening in Europe.
In early 1994, Mexico was adhering to a fixed-exchange-rate system. Use the
Mundell”Fleming model to illustrate graphically the short-run impact on the exchange
rate and level of output of increased country risk caused by the Chiapas uprising and the
assassination of presidential candidate Colosio. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the new
short-run equilibrium.
