The real interest rate can be thought of as
A) the price of current consumption relative to future consumption.
B) the price of current consumption completely smoothed over a lifetime.
C) the price of future consumption smoothed completely over a lifetime.
D) the price of current consumption divided by the price of current saving.
In the two-sector growth models, the size of the labor force, the proportion of the labor
force devoted to research, and the productivity of researchers determine the
A) investment necessary for steady-state growth.
B) steady-state capital stock.
C) growth rate of labor-augmenting technological change.
D) human capital stock.
The slope of the aggregate demand curve indicates that ________ in the inflation rate
leads to ________ of real GDP demanded by households and firms.
A) an increase; a higher level
B) a decrease; a lower level
C) a decrease; a higher level
D) an increase; no change in the level
Suppose you made a 5% down payment on a house on January 1, 2013, and on January
1, 2014 you decide to sell the house. If the price of your house decreased by 10%, the
return on your investment in the house would be
A) -5%.
B) -10%.
C) -50%.
D) -200%.
The cost of borrowing funds which is stated on a loan is the
A) prime interest rate.
B) nominal interest rate.
C) real interest rate.
D) core PCE interest rate.
Economists have found that firms are
A) less likely to change prices as a result of shocks to the aggregate economy than
shocks limited to the firm’s particular sector.
B) more likely to change prices as a result of shocks to the aggregate economy than
shocks limited to the firm’s particular sector.
C) equally likely to change prices as a result of shocks to the aggregate economy as
they are shocks limited to the firm’s particular sector.
D) unlikely to change prices as a result of both shocks to the aggregate economy and
shocks limited to the firm’s particular sector.
In a circular-flow diagram, the total value of ________ equals the total value of
________.
A) spending on goods and services; income
B) GDP; GNP
C) capital; labor
D) exports; imports
The economic analysis of extending the duration of unemployment benefits to 99 weeks
involves both positive and normative analysis. Consider the following consequences of
extending the duration of unemployment benefits:
a. Extending the duration of unemployment benefits to 99 weeks will create less
incentive for some unemployed workers to seek employment.
b. Extending the duration of unemployment benefits to 99 weeks will increase the total
amount of government expenditure on unemployment benefits.
c. The benefits received by those collecting unemployment benefits should be valued
more highly than the increase in government expenditure needed to pay the benefits.
d. By extending the duration of unemployment benefits to 99 weeks, the unemployed
will have more time to acquire new skills before reentering the workforce.
Which of the consequences above are positive statements and which are normative
statements?
A) a and b are positive statements; c and d are normative statements.
B) Only b is a positive statement; a, c, and d are normative statements.
C) a and d are positive statements; b and c are normative statements.
D) a, b, and d, are positive statements; only c is a normative statement.
An increase in the unemployment rate which is accompanied by a decrease in the
inflation rate is represented by a ________ the Phillips curve.
A) movement down
B) movement up
C) upward shift of
D) downward shift of
Table 2.3
2007 2010 2013
Quantity Price Quantity Price Quantity Price
Table 3 gives quantities and prices for each good produced in a simple economy in
2007, 2010, and 2013.
Refer to Table 2.3. Nominal GDP in 2007 is
A) $320.63.
B) $490.00.
C) $568.00.
D) $1282.50.
Since 1990, the growth rate of real gross private investment in the United States has
been relatively ________ and the growth rate of real personal consumption has been
relatively ________.
A) stable; stable
B) stable; volatile
C) volatile; stable
D) volatile; volatile
If Greece chose to abandon the euro and the Greek government decided to exchange
euro bank deposits for drachmas, the affected bank depositors would experience gains if
the
A) euro then appreciated.
B) euro then depreciated.
C) drachma then appreciated.
D) drachma then depreciated.
A decrease in the discount rate ________ bank reserves and ________ the federal funds
rate.
A) increases; raises
B) increases; lowers
C) decreases; raises
D) decrease; lowers
The substitution effect indicates that higher real interest rates ________ current
consumption for households who are lenders and ________ current consumption for
households who are borrowers.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Holding everything else constant, if the nominal interest rate decreases, the interest paid
on the debt will ________ the debt-to-GDP ratio, and nominal GDP growth will
________ the debt-to-GDP ratio.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
The Treasury yield curve will be downward sloping when
A) investors expect future short-term interest rates to be significantly lower than current
short-term interest rates.
B) investors expect future short-term interest rates to be significantly higher than
current short-term interest rates.
C) short-term interest rates are significantly lower than long-term interest rates.
D) short-term interest rates are equal to long-term interest rates.
Assume the economy is initially in equilibrium where potential GDP equals real GDP.
If the expected inflation rate, the term structure effect, and the default-risk premium are
constant and the Fed wants to lower the inflation rate, the Fed could ________ the
target short-term nominal interest rate, which will result in real GDP being ________
potential GDP.
A) increase; greater than
B) increase; less than
C) decrease; greater than
D) decrease; less than
An increase in foreign investment in Brazil’s mining industry will increase the capital
stock in Brazil. All else equal, as the capital stock increases, the marginal product of
capital (MPK) will
A) increase due to diminishing marginal returns.
B) decrease due to diminishing marginal returns.
C) increase since capital is not subject to diminishing marginal returns.
D) decrease since capital is not subject to diminishing marginal returns.
From 1977-2011, the average duration of unemployment has been highest in which of
the following places?
A) Canada
B) Europe
C) Mexico
D) the United States
Maryanne expects to work for another 30 years and expects to live another 10 years
after she retires. If Maryanne completely smooths consumption over her lifetime, her
marginal propensity to consume out of permanent increases in income is
A) 0.25
B) 0.33
C) 0.67
D) 0.75
In the Solow growth model, a change in the capital-labor ratio is equal to
A) (saving – investment).
B) saving + depreciation).
C) (investment – depreciation).
D) (capital stock – labor force).
Which of the following statements regarding the use of gold as money is false?
A) It is durable.
B) It is acceptable to most people.
C) It is valuable relative to its weight.
D) It has standardized quality.
Assume the interest rate on a current one-year bond is 3%, and the expected interest
rate on the one-year bond one year from now is 6%. If the term premium on a two-year
bond is 0.5%, then the interest rate on the two-year bond will be
A) 4%.
B) 5%.
C) 5%.
D) 5%.
________ is a company that obtains funds primarily from wealthy investors and uses
the funds to make complicated, often risky investments.
A) A mutual fund
B) A pension fund
C) A hedge fund
D) An investment bank
A depreciation of the Mexican peso relative to the U.S. dollar would ________
Mexican firms that are exporting goods to the United States and would ________
Mexican firms that have borrowed in U.S. dollars.
A) help; help
B) help; hurt
C) hurt; help
D) hurt; hurt
Suppose you purchase a one-year bond that has a $450 coupon and a face value of
$5,000, and immediately after you purchase the bond, new bonds are issued that are
otherwise identical, except they have coupons of $375. If you sell your bond, the price
of your bond will be
A) $4931.20.
B) $5,000.00.
C) $5,069.77.
D) $5,134.66.
Over time, nations tend to converge to
A) the same balanced growth path and same income per capita.
B) the same balanced growth path but varying income per capita.
C) different balanced growth paths but the same income per capita.
D) different balanced growth paths because of varying income per capita.
Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital
stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 3, the
equilibrium real rental price of capital is
A) $0.33.
B) $0.75.
C) $1.00.
D) $2.22.
An appreciation of the Mexican peso relative to the U.S. dollar would ________
Mexican firms that are exporting goods to the United States and would ________
Mexican firms that have borrowed in U.S. dollars.
A) help; help
B) help; hurt
C) hurt; help
D) hurt; hurt
The U.S. federal government obtains most of its revenues through taxes from three
sources. Which of the following is not one of those three main sources of federal
revenue?
A) corporate income taxes
B) social insurance taxes
C) sales and excise taxes
D) individual income taxes
Explain how inflation can be costly even if it is expected.
Explain how an economy which is presently above its balanced growth path will
converge back to its balanced growth path?
What is long-run economic growth and how is it measured?
Suppose an increase in real GDP is accompanied by an increase in the money supply
from $600 billion to $700 billion. Draw a graph of the money market showing these
changes, where the equilibrium nominal interest rate remains at 5%.
Explain how a bank run can cause a bank to fail?
Describe how you might analyze and evaluate the following claim: College students
who graduate during an economic recession accept jobs that, on average, pay 9% less
than jobs accepted by students who graduate during economic expansions.
What is a cyclically adjusted budget deficit or surplus, and how is it used to determine
whether discretionary fiscal policy is expansionary or contractionary?
What are rational expectations, and how might rational expectations make monetary
policy ineffective?
What is depreciation, and what happens to the depreciation line when the rate of
depreciation increases or decreases?
Luke was earning $60 per hour and working 40 hours per week. Luke’s wage rose to
$70 per hour, and as a result, he now works 50 hours per week. What can you conclude
from this information about the substitution and income effects of a wage increase for
Luke?
Explain the differences between aggregate demand shocks and aggregate supply
shocks.
Explain the structure of the Federal Reserve System.
Using the IS–MP model, explain what happens to output and the real interest rate when
the IS curve shifts to the right and when it shifts to the left, and when the MP curve
shifts up and when it shifts down?
Suppose you purchase a new home for $75,000, making a down payment of 20% and
taking out a mortgage on the balance. What is the return on your investment in your
home if one year later the price of the home increases by 5%? What if the price of the
home decreases by 5%?
During the 1990s, Japan experienced periods of deflation and nominal interest rates that
approached zero percent. Why would anyone lending money agree to a nominal interest
rate of almost zero percent?
What is stagflation, and how does it occur? How is stagflation represented in the
aggregate demand-aggregate supply model?
When and why did Congress create the Federal Reserve System? What other attempts,
if any, were made to establish a central bank in the United States?