In a small open economy with a floating exchange rate, if the government imposes a
tariff on foreign goods, then in the new short-run equilibrium:
A) imports will decrease while exports remain constant, leading to a rise in net exports.
B) imports will decrease and exports will increase, leading to a rise in net exports.
C) imports will decrease and exports will decrease by an equal amount.
D) both imports and exports will remain unchanged.
The recent reduced demand for unskilled workers relative to skilled workers has led to
______ for unskilled workers in Europe compared to ______ for unskilled workers in
the United States.
A) unemployment; lower wages
B) lower wages; unemployment
C) more unionization; efficiency wages
D) efficiency wages; more unionization
If two economies are identical (with the same population growth rates and rates of
technological progress), but one economy has a lower saving rate, then the steady-state
level of income per worker in the economy with the lower saving rate:
A) will be at a lower level than in the steady state of the high-saving economy.
B) will be at a higher level than in the steady state of the high-saving economy.
C) will be at the same level as in the steady state of the high-saving economy.
D) will grow at a slower rate than in the high-saving economy.
In a neoclassical economy, assume that the government lowers both government
spending and taxes by the same amount. By doing so:
A) investment falls and the interest rate rises.
B) investment rises and the interest rate falls.
C) investment and the interest rate both fall.
D) investment and the interest rate both rise.
In Irving Fisher’s two-period model, the substitution effect of an increase in the interest
rate in the first period, for a saver, is the:
A) decrease in the relative price of second-period consumption.
B) additional income earned on first-period saving.
C) decrease in the relative price of first-period consumption.
D) additional income earned on second-period saving.
A bank balance sheet consists of only the following items:
Deposits $1,000
Reserves $100
Securities $400
Debt $500
Loans $2,000
What is the value of bank capital?
A) “$1,000
B) +$500
C) +$1,000
D) +$1,500
According to the model developed in Chapter 3, when government spending increases
and taxes increase by an equal amount:
A) consumption and investment both increase.
B) consumption and investment both decrease.
C) consumption increases and investment decreases.
D) consumption decreases and investment increases.
Changes in fiscal policy shift the:
A) LM curve.
B) money demand curve.
C) money supply curve.
D) IS curve.
During a financial crisis, such as the Great Depression or the recession of 2008″09,
financing constraints become ______ prevalent and investment spending ______.
A) more; increases
B) more; decreases
C) less; increases
D) less; decreases
When adaptive expectations are used to model inflation expectations in the Phillips
curve, then the natural rate of unemployment is called the ______ rate of
unemployment.
A) structural
B) cyclical
C) short-run aggregate supply
D) nonaccelerating inflation
When capital increases by DK units and labor increases by DL units, output (DY)
increases by:
A) DK + DL units.
B) MPL + MPK units.
C) (MPK × DK) + (MPL × DL) units.
D) (MPL × DK) + (MPK × DK) units.
The fact that traditional methods of policy evaluation do not take into account the
impact of policy on expectations is known as:
A) stabilization policy.
B) the political business cycle.
C) the Lucas critique.
D) Okun’s law.
If domestic saving is less than domestic investment, then net exports are ______ and net
capital outflows are ______.
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive
In a small open economy, if the government encourages investment, through, say, an
investment tax credit, investment:
A) increases and is financed through an increase in national saving.
B) increases and is financed through an increase in exports.
C) increases and is financed through an inflow of foreign capital.
D) does not increase; the interest rate rises instead.
When the Fed decreases the interest rate paid on reserves, it:
A) increases the reserve”deposit ratio (rr).
B) decreases the reserve”deposit ratio (rr).
C) increases the monetary base (B).
D) decreases the monetary base (B).
In a small open economy, if the world interest rate falls, then domestic investment will
_____ and the real exchange rate will _____, holding all else constant.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
Each of the following changes would allow the measured budget deficit to provide a
truer picture of fiscal policy except:
A) correcting for the effects of inflation.
B) offsetting changes in government liabilities with changes in government assets.
C) excluding some liabilities altogether.
D) correcting for the effects of the business cycle.
a. What is the difference between an illiquid bank and an insolvent bank?
b. Would the Federal Reserve’s lender of last resort function be the most appropriate
remedy for an illiquid or an insolvent bank? Explain.
c. Would the FDIC’s resolution authority be the most appropriate remedy for an illiquid
or an insolvent bank? Explain.
Policy is conducted by discretion if policymakers:
A) announce in advance how policy will respond to various situations and commit
themselves to following through on this announcement.
B) are free to size up the situation case by case and choose whatever policy seems
appropriate at the time.
C) announce and maintain a constant growth rate of the money supply.
D) announce and achieve a balanced government budget.
According to the quantity equation, if the velocity of money and the supply of money
are fixed, and the price level increases, then the quantity of goods and services
purchased:
A) increases.
B) decreases.
C) does not change.
D) may either increase or decrease.
Firms currently have incentives to temporarily lay off workers because firms typically
are charged for ______ of workers’ unemployment benefits.
A) all
B) only a part
C) none
D) twice the cost
In past non-recessionary periods, a typical worker in the United States who is covered
by unemployment insurance receives ______ percent of his or her former wages for
______ weeks.
A) 50; 26
B) 50; 52
C) 67; 26
D) 67; 52
Assume that the equation for demand for bread at a small bakery is Qd = 60 ” 10Pb +
3Y, where Qd is the quantity of bread demanded in loaves and Y is the average income
in the town in thousands of dollars.
a. If the average income in the town is 10, state the equation for Qd in terms of Pb.
b. Draw a graph of the demand curve with Qd on the horizontal axis and Pb on the
vertical axis. Label the curve DD.
If the capital stock equals 200 units in year 1 and the depreciation rate is 5 percent per
year, then in year 2, assuming no new or replacement investment, the capital stock
would equal _____ units.
A) 210
B) 200
C) 195
D) 190
The version of Okun’s law studied in Chapter 10 assumes that with no change in
unemployment, real GDP normally grows by 3 percent over a year. If the
unemployment rate fell by 1 percentage point over a year, Okun’s law predicts that real
GDP would:
A) decrease by 1 percent.
B) decrease by 2 percent.
C) increase by 4 percent.
D) increase by 5 percent.
______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall.
A) Inflation; deflation
B) Interest rates; the discount rate
C) Investment; depreciation
D) International trade; depressions
In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that
taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters
of the tax code and t is positive but less than 1. As compared to a case where t is zero,
the multiplier for government purchases in this case will:
A) not change.
B) be smaller.
C) be bigger.
D) be equal to 1.
Explain why each of the following statements is a rationale for conducting active or
passive policy:
a. Economic circumstances can change dramatically between the time that an economic
downturn begins and the time when policy actions have an effect on the economy.
b. Economists are not very accurate forecasters.
c. Increases in government spending generate increases in economic output.
d. Fluctuations in economic output have been less severe since World War II.
Building an economic model based on the assumption of a small open economy is
useful because:
A) it accurately describes the U.S. economy.
B) it is more complicated and realistic than a model based on the assumption of a large
open economy.
C) this simplifying assumption can assist our understanding and intuition of open
economy macroeconomics.
D) it is not possible to build models of large open economies.
The value of banks’ owners’ equity is called bank:
A) deposits.
B) reserves.
C) capital.
D) liquidity.
Because corporate income tax laws do not define profit to be the same as economic
profit, many economists believe that the corporate income tax ______ investment.
A) encourages
B) discourages
C) does not affect
D) promotes excessive
Government policies directed at reducing frictional unemployment include:
A) abolishing minimum-wage laws.
B) making unemployment insurance 100 percent experience rated.
C) increasing the earned income credit.
D) making government part of the union-firm wage bargaining process.
The government budget deficit is the ______, and government debt is the ______.
A) amount by which imports exceed exports; amount by which government spending
exceeds government revenue
B) amount by which government spending exceeds government revenue; amount by
which imports exceed exports
C) amount by which government spending exceeds government revenue; accumulation
of past government borrowing
D) accumulation of past government borrowing; amount by which government
spending exceeds government revenue
To increase the money multiplier, the Fed can:
A) conduct open-market purchases.
B) conduct open-market sales.
C) raise the interest rate paid on reserves.
D) lower the interest rate paid on reserves.
The Phillips curve analysis described in Chapter 14 implies that there is a negative
tradeoff between inflation and unemployment in:
A) both the short run and long run.
B) in the short run only.
C) in the long run only.
D) in neither the short run nor the long run.
Explain the two uses of saving in the steady state in the Solow model with population
growth, but no technological progress.
Assume that a government decides to maintain a constant interest rate in the money
market and adjusts the money supply accordingly. What would be the impact of such a
policy on the LM curve and IS curve?
How do changes in price level affect the equilibrium in the IS-LM model in the short as
well as long run?
*Note: The numbers given in this exhibit and the answers to the following questions
differ from those in Table 2-1 in the body of the text.
(Exhibit: Totals Recorded for United States) What were GDP, consumption
expenditures, investment expenditures, government purchases, and net exports?
Suppose you are an economist working for the Federal Reserve when droughts in the
Southeast and floods in the Midwest substantially reduce food production in the United
States. Use the aggregate demand”aggregate supply model to illustrate graphically your
policy recommendation to accommodate this adverse supply shock, assuming that your
top priority is maintaining full employment in the economy. Be sure to label: i. the axes;
ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v.
the terminal equilibrium values. State in words what happens to prices and output as a
combined result of the supply shock and the recommended Federal Reserve
accommodation.
According to the IS-LM model, what do an inward and outward shift in the aggregate
demand curve mean?
Are relative prices or nominal prices the right indicators in the context of supply
changes?
Define the terms: i) adverse supply shocks, ii) favorable supply shocks.
How do binding borrowing constraints change the determination of current
consumption in the Fisher two-period model and in the random-walk hypothesis
(permanent-income hypothesis with rational expectations)?
Two identical countries, Alpha and Beta, can be described by the IS“LM model in the
short run. The governments of both countries cut taxes by the same amount. The
Central Bank of Alpha follows a policy of holding a constant money supply. The
Central Bank of Beta follows a policy of holding a constant interest rate. Compare the
impact of the tax cut on income and interest rates in the two countries.
What is the natural rate hypothesis? Explain the term NAIRU.
According to the monetary policy rule, under what condition does the real interest rate
equal the natural rate of interest? What does the Taylor principle suggest for a monetary
policy design?
What does the Solow model predict?
From the following graph, find the world interest rate at which there will be equilibrium
in the capital market of small open economy?
Briefly explain the neoclassical model of investment.
Assume that an economy starts at a long-run equilibrium with a natural rate of
unemployment equal to 6 percent and an inflation rate of 10 percent. Assume that there
is a short-run tradeoff between inflation and unemployment as described by a Phillips
curve. Use the Phillips curve to graphically illustrate why a central bank that desires
both low inflation and low unemployment has the incentive to renege on an announced
policy to reduce inflation to 3 percent, if people set wages and prices on the expectation
of 3 percent inflation and the central bank has the discretion to change its monetary
policy after these expectations are set.
