Figure: Classical Versus Keynesian Macroeconomics
Look at the figure Classical Versus Keynesian Macroeconomics. According to the
Keynesian view, if this economy shifts from AD2 to AD1, perhaps because of a large
increase in government spending, the price level will _____ and real GDP will _____.
A) rise; fall
B) not change; rise
C) rise; not change
D) rise; rise
Expansionary fiscal policy pushes the aggregate demand curve to the right.
A) True
B) False
The Friedman”Phelps (natural rate) hypothesis made the strong prediction that:
A) once inflation gets embedded in people’s expectations, unemployment and inflation
will have a trade-off.
B) the unemployment and inflation trade-off will not survive if inflation gets embedded
in people’s expectations.
C) there will always be an unemployment and inflation trade-off.
D) the unemployment and inflation trade-off is a myth.
If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer
payments is:
A) less than 4.
B) equal to 4.
C) greater than 4.
D) equal to 0.75.
It is certain that the equilibrium quantity will rise when:
A) the supply curve and the demand curve both shift to the right.
B) the supply curve shifts to the right and the demand curve shifts to the left.
C) supply and demand both shift to the left.
D) supply shifts to the left and demand stays the same.
Falling inventories indicate _____ unplanned inventory investment and a _____
economy.
A) positive; growing
B) positive; slowing
C) negative; slowing
D) negative; growing
Figure: The Market for Loanable Funds III
Look at the figure The Market for Loanable Funds III. If the government in a closed
economy finances deficits by selling bonds and it decides to decrease defense spending
by $200 billion, the equilibrium interest rate will:
A) rise to 18%.
B) not change.
C) fall to 13.5%.
D) fall to 12%.
Money is unique because it is the only asset that can be used as a store of value.
A) True
B) False
The United States must give up the production of 500 bicycles to produce 20 additional
tractors. The opportunity cost of producing 100 bicycles is _____ tractor(s).
A) 1
B) 4
C) 25
D) 100
An efficiency wage:
A) can be secured only with the help of a labor union.
B) is one that causes greater frictional unemployment.
C) is offered by an employer to encourage workers to work harder.
D) results in a less productive work force.
Figure: Short-Run Equilibrium
Look at the figure Short-Run Equilibrium. It reflects a short-run inflationary gap.
According to the labeling on the graph, the size of the inflationary gap is equal to:
A) P2 ” P1.
B) Y1 ” YP.
C) P2 ” P0.
D) P1 ” P0.
If a country adopts a fixed rate, it is committing not to engage in inflationary policies
because inflationary policies would destabilize the exchange rate.
A) True
B) False
If the target exchange rate of a fixed currency is below the equilibrium exchange rate, to
reach the target rate, the government should limit the ability of foreigners to buy its
currency.
A) True
B) False
Figure: Shifts in Demand and Supply
Look at the figure Shifts in Demand and Supply. The figure shows how supply and
demand might shift in response to specific events. Suppose consumer incomes increase.
Which panel BEST describes how this will affect the market for used furniture, an
inferior good?
A) panel A
B) panel B
C) panel C
D) panel D
A shadow bank is a:
A) branch of the main office of a bank.
B) bank that is operated by a shadow government.
C) financial firm that is not closely watched or effectively regulated.
D) a credit union or a savings and loan institution.
The value of themarginal propensity to consume is:
A) 1.
B) greater than 1.
C) between 0 and 1.
D) less than 0 and greater than “1.
Between 1921 and 1923 Germany underwent:
A) deflation.
B) disinflation.
C) an increase in the purchasing power of its currency.
D) hyperinflation.
If real GDP falls when nominal GDP increases, then prices have increased.
A) True
B) False
During Brazil’s hyperinflation of the 1990s the economy lost real resources when the
transportation sector grew very large to cope with the consequences of the high rate of
inflation.
A) True
B) False
If the actual interest rate is 6% and the target rate is 4%, the Fed should decrease the
money supply.
A) True
B) False
Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the
Phillips curve with an expected inflation rate of 2%.
Look at the figure Expected Inflation and the Short-Run Phillips Curve. Suppose that
this economy has an unemployment rate of 6%, no inflation, and no expectation of
inflation. If the central bank decreases the money supply such that aggregate demand
shifts to the left and unemployment rises to 8%, then inflation will:
A) fall to “2%.
B) not change.
C) rise to 2%.
D) rise to 4%.
The present value of $1 to be paid 10 years in the future will increase with the interest
rate.
A) True
B) False
Keynes believed that:
A) monetary policies had the greatest impact on the economy.
B) long-run effects were most important and activist policies were most likely to be
detrimental.
C) business decisions could be understood if policy makers did not use activist policies.
D) short-run effects were important and changes in aggregate demand could affect
output and price levels.
Deflation is:
A) a decrease in unemployment.
B) a decreasing aggregate price level.
C) a decline in wages.
D) a recession.
An increase in government transfers is an example of _____ fiscal policy because it
shifts the aggregate demand curve to the _____ aggregate output.
A) expansionary; left, increasing
B) contractionary; left, decreasing
C) expansionary; right, increasing
D) contractionary; right, decreasing
The GDP deflator measures changes in the cost of a market basket of raw commodities,
such as steel, electricity, and coal.
A) True
B) False
Equilibrium exists when:
A) output is distributed equitably.
B) scarcity is eliminated.
C) an individual would be better off taking a different action.
D) no individual has an incentive to change his or her behavior.
The financial system contributes to long-run economic growth by channeling funds
from savers to businesses for investment spending.
A) True
B) False
Your neighbor is mowing her yard one afternoon when she stops to have some
lemonade. She drinks one glass and is considering having a second glass. This is an
example of:
A) marginal analysis.
B) benefit analysis.
C) cost analysis.
D) equilibrium analysis.
During a recession, one will often observe:
A) rising aggregate output.
B) rising unemployment rates and falling aggregate output.
C) rising employment rates.
D) zero unemployment rates.
Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their
income. There are no taxes and no foreign trade. Its currency is the arc. Potential output
is 600 billion arcs.
Look at the scenario Fiscal Policy. Suppose that actual output is 700 billion arcs, and
the government of Arcadia decides to tax its citizens. To bring the economy to potential
output, the government should:
A) increase taxes by 33.33 billion arcs.
B) increase taxes by 3.33 billion arcs.
C) keep taxes at zero.
D) increase both taxes and government spending by 0.33 billion arcs.
Workers in country A have wage contracts for cost-of-living adjustments (COLAs),
which adjust wages to offset the effect of inflation, and workers in country B do NOT.
When the central banks of countries A and B increase the money supply:
A) prices in country A increase faster than prices in country B.
B) prices in country B increase faster than prices in country A.
C) prices in countries A and B will change at the same rate.
D) COLAs have no effect on the speed of price changes.
In the early 1990s banking crises occurred in Finland, Sweden, and Japan because:
A) of real estate bubbles in each country.
B) the central banks of these countries were prohibited from conducting monetary
policy.
C) the value of the euro fell to historically low levels.
D) there were many runs on banks.
Look at the table The Market for Chocolate-Covered Peanuts. If the price of
chocolate-covered peanuts is $0.80, there is a monthly:
A) surplus of 140 bags.
B) shortage of 140 bags.
C) surplus of 70 bags.
D) shortage of 70 bags.
Explain how the Wall Street Reform and Consumer Protection Act of 2010 addressed
the problems that led to the 2008 financial crisis.
Explain what is meant by the paradox of thrift.
Economists claim that opening up a market to imports leads to an increase in total
surplus but that trade makes winners and losers. How does this work?
Figure: I-E and AD
Look at the figure I-E and AD. Explain how a change in the price level increases the
equilibrium real GDP from $8 billion to $10 billion.
It’s your birthday, and your uncle opens up his wallet and gives you a $20 bill. You take
the $20 and deposit it in your checking account. What is the effect of this transaction on
M1 or M2? Explain.
Suppose a nation has a trade deficit on goods and services in the current account. Does
this imply that the total balance of the current account is a deficit?
What is the goal of contractionary monetary policy, and how does it work in the short
run?
Many college freshmen describe themselves as pre-med, but a very small percentage of
these freshmen will ever attend medical school. After the first course in biology or
chemistry, many decide to major in something other than the natural sciences. Which of
the 12 principles is at work here?
Explain the impact of an expansionary monetary policy in the United States, where
exchange rates are floating.
The most efficient way to dispose of industrial waste is to dump it in a nearby river or
parcel of land. Why is this illegal?
How is the Federal Reserve accountable to the voters but at the same time insulated
from short-term political pressures?
Look at the table Crab and Cake Production in Chesapeake. What is the opportunity
cost of increasing the production of crabs from zero to 100? What is the opportunity
cost of increasing the production of crabs from 400 to 500? Explain the difference in
your answers.
You and your roommate are taking the same economics class. When it comes to doing
homework assignments, your roommate draws beautifully precise graphs, while you are
an extremely fast typist. Therefore, you and your roommate work on the assignments
together. Which of the 12 principles is at work here?
Suppose that on January 1 the exchange rate was 120 per U.S. dollar. On December 31
of that year, it was 125 per dollar. Over the course of that year, did the dollar appreciate
or depreciate against the yen? Did the change in the exchange rate make U.S. goods and
services more or less attractive to Japanese consumers? Explain.
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent proponent of classical economics. What would this classical
economist recommend or not recommend? Explain.
Suppose the economy is in short-run equilibrium. Use the AD”AS model to predict
short-run changes to real GDP and the aggregate price level if the stock of physical
capital is relatively small and falling. Explain your reasoning.
Explain two purposes of devaluation and revaluation in a fixed exchange rate regime.
Figure: Nations A and B
Look at the figure Nations A and B.
Suppose that in 1960 each nation had $100 of physical capital for each worker and in
2010 each nation had $400 of physical capital per worker. Compute the growth of real
GDP per capita for both nations.