Nominal GDP measures the value of goods and services in ______ prices, while real
GDP measures the value of goods and services in ______ prices.
A) foreign; domestic
B) domestic; foreign
C) current; constant
D) constant; current
All of the following are causes of structural unemployment except:
A) minimum-wage laws.
B) the monopoly power of unions.
C) unemployment insurance.
D) efficiency wages.
The best measure of the economic satisfaction of the members of a society is:
A) nominal GDP.
B) real GDP.
C) the rate of inflation.
D) the value of corporate profits.
An economy must sacrifice 12 percent of GDP to reduce inflation. Which of the
following plans represents the “cold turkey” solution to inflation?
A) Reduce output by 1 percent for 12 years.
B) Reduce output by 2 percent for 6 years.
C) Reduce output by 4 percent for 3 years.
D) Reduce output by 12 percent for 1 year.
If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss
price level equals 2 francs per good, then the real exchange rate between Swiss goods
and U.S. goods is ______ Swiss good(s) per U.S. good.
A) 0.5
B) 2.5
C) 5
D) 10
Two equivalent ways to view GDP are as the:
A) total payments made to all workers in the economy or the total profits of all firms
and businesses in the economy.
B) total expenditures on all goods produced in the economy or the total income earned
from producing all services in the economy.
C) total profits of all firms and businesses in the economy or the total consumption of
goods and services by all households in the economy.
D) total income of everyone in the economy or the total expenditure on the economy’s
output of goods and services.
In the Solow growth model with population growth, but no technological progress, if in
the steady state the marginal product of capital equals 0.10, the depreciation rate equals
0.05, and the rate of population growth equals 0.03, then the capital per worker ratio
____ the Golden Rule level.
A) is above
B) is below
C) is equal to
D) will move to
If the IS curve is given by Y = 1,700 ” 100r and the LM curve is given by Y = 500 +
100r, then equilibrium income and interest rate are given by:
A) Y = 1,100, r = 6 percent.
B) Y = 1,200, r = 5 percent.
C) Y = 1,000, r = 5 percent.
D) Y = 1,100, r = 5 percent.
According to the Phillips curve, firms _____ prices when output is below the natural
level of output, or equivalently, when the unemployment rate is _____ the natural rate
of unemployment.
A) raise; above
B) raise; below
C) lower; above
D) lower; below
In a Cobb”Douglas production function the marginal product of capital will increase if:
A) the quantity of labor increases.
B) the quantity of capital increases.
C) labor’s share of output increases.
D) average capital productivity decreases.
The nominal interest rate, it, is the rate of return between periods:
A) t “ 1 and t
B) t and t + 1
C) t “ 1 and t + 1
D) t and t + 2
In a large open economy, if an import quota is adopted, then:
A) net exports remain unchanged, as imports and exports decrease by equal amounts,
while the real exchange rate rises.
B) net exports remain unchanged, as imports and exports decrease by equal amounts,
while the real exchange rate falls.
C) net exports rise and the real exchange rate rises.
D) net exports rise and the real exchange rate falls.
Explain how the Solow growth model differs from models of endogenous growth with
respect to:
a. the sources of technological progress.
b. returns to capital.
In the United States, monetary policy is controlled by:
A) the President.
B) the Congress.
C) the Federal Reserve.
D) the Treasury Department.
The sacrifice ratio measures the:
A) number of percentage points of the money supply that must be reduced to reduce
inflation by 1 percentage point.
B) extra taxes that must be paid to balance the budget.
C) number of months of real gross domestic product (GDP) that must be foregone to
reduce the inflation rate by 1 percentage point.
D) percentage of a year’s real gross domestic product (GDP) that must be foregone to
reduce inflation by 1 percentage point.
If the IS curve is given by Y = 1,700 ” 100r, the money demand function is given by
(M/P)d = Y ” 100r, the money supply is 1,000, and the price level is 2, then if the money
supply is raised to 1,200, equilibrium income rises by:
A) 200 and the interest rate falls by 2 percent.
B) 100 and the interest rate falls by 1 percent.
C) 50 and the interest rate falls by 0.5 percent.
D) 200 and the interest rate remains unchanged.
The debt-deflation theory of the Great Depression suggests that an ______ deflation
redistributes wealth in such a way as to ______ spending on goods and services.
A) unexpected; reduce
B) unexpected; increase
C) expected; reduce
D) expected; increase
If citizens vote on the basis of both low inflation and low unemployment at the time of
the election, then presidents might, in order to ensure their reelection:
A) spur inflation soon after their elections, and then cause a recession.
B) stimulate the economy throughout their terms.
C) cause a recession soon after their election, and then stimulate the economy.
D) run a tight monetary and fiscal policy throughout their terms.
For each of the following policies indicate whether the policy is i. a monetary or a fiscal
policy, ii an active or a passive policy, and iii a policy by rules or with discretion:
a. the central bank follows a policy of allowing the money supply to grow at a constant
4 percent per year;
b. a government follows a policy of keeping government spending over a calendar year
equal to government revenue over the calendar year;
c. the central bank uses judgment to adjust the growth of the money supply based on
expectations of what will happen to output and inflation over the next five years.
d. the government keeps tax laws unchanging and allows government spending to
change, depending on which spending bills are passed by the legislature.
e. the central bank follows a policy of adjusting the money supply according to a
formula based on deviations of unemployment from the natural rate of unemployment.
More frequent holidays for workers in Europe than in the United States contribute 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.
Compared to the size of government debt as a percentage of GDP in other major
industrial countries, the federal government of the United States:
A) is one of the most heavily indebted governments.
B) has accumulated a relatively small debt.
C) has accumulated somewhat greater than average debt.
D) is one of the least indebted governments.
A rise in the price of an asset above its fundamental value is called a(n):
A) financial panic.
B) insolvency.
C) liquidity crisis
D) speculative bubble.
According to the life-cycle model, when wealth and income increase together in the
long run, the average propensity to consume.
A) increases
B) decreases
C) remains constant
D) can either increase or decrease
In the Solow model with technological progress, the steady-state growth rate of output
per effective worker is:
A) 0.
B) g.
C) n.
D) n + g.
According to the Mundell”Fleming model, under:
A) floating exchange rates, a monetary expansion raises income whereas a fiscal
expansion does not, but under fixed exchange rates, a fiscal expansion raises income
whereas a monetary expansion does not.
B) both floating and fixed exchange rates, a monetary expansion raises income, but a
fiscal expansion does not.
C) both floating and fixed exchange rates, a fiscal expansion raises income, but a
monetary expansion does not.
D) floating exchange rates, a fiscal expansion raises income whereas a monetary
expansion does not; but under a fixed exchange rate, a monetary expansion raises
income whereas a fiscal expansion does not.
Starting from long-run equilibrium, without policy intervention, the long-run impact of
an adverse supply shock is that prices will:
A) be permanently higher and output will be restored to the natural rate.
B) return to the old level and output will be restored to the natural rate.
C) be permanently higher and output will be permanently lower.
D) return to the old level, but output will be permanently lower.
Business fixed investment, residential investment, and inventory investment ______ as
the real interest rate increases and ______ as output increases.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
A difference between the economic long run and the short run is that:
A) the classical dichotomy holds in the short run but not in the long run.
B) monetary and fiscal policy affect output only in the long run.
C) demand can affect output and employment in the short run, whereas supply is the
ruling force in the long run.
D) prices and wages are sticky in the long run only.
Debt financing is obtaining funds for a business by:
A) borrowing.
B) issuing ownership shares.
C) seigniorage.
D) government subsidy
Assume that some large foreign countries begin to subsidize investment by instituting
an investment tax credit. Then, if world saving does not depend on the interest rate,
world investment:
A) will rise and small country investment will fall.
B) will rise and small country investment will remain unchanged.
C) will remain unchanged and small country investment will fall.
D) and small country investment will both remain unchanged.
In a small open economy with a fixed exchange rate, if the government imposes an
import quota, then net exports:
A) decrease but the money supply falls and income falls.
B) increase, the money supply increases, and income increases.
C) are unchanged but the money supply falls and income falls.
D) are unchanged, the money supply is unchanged, and income is unchanged.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, if the central bank permanently reduces its inflation target, then in the
initial period of the change output _____ and inflation _____.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases