Which of the following is not a proposed explanation for that fact that Americans on
average work 20 percent more hours than the typical resident of western Europe?
A) Europeans have more taste for leisure than Americans.
B) Americans have a lower unionization rate than Europeans.
C) Europeans face higher tax rates than Americans.
D) The underground economy is larger in America than in Europe.
The amount by which government spending exceeds government revenues is called the
______, and the accumulation of past government borrowing is called the ______.
A) deficit; debt
B) debt; deficit
C) devaluation; deflation
D) deflation; devaluation
Sovereign debt refers to debt issued:
A) without collateral.
B) with no rating by a credit-rating agency.
C) by governments.
D) with a promise to repay in a foreign currency.
People use money as a store of value when they:
A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.
In the Solow growth model with population growth, but no technological change, which
of the following will generate a higher steady-state growth rate of total output?
A) a higher saving rate
B) a lower depreciation rate
C) a higher population growth rate
D) a higher capital per worker ratio
Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the
quantity of money, P is the price level, Y is real output, and i is the nominal interest
rate. What is the average velocity of money in this economy?
A) i
B) 4i
C) 1/4i
D) 0.25
Liabilities of banks include:
A) reserves.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.
In the IS“LM model, a decrease in expected inflation (or an increase in expected
deflation), leads to a(n):
A) increase in both output and the nominal interest rate.
B) decrease in both output and the nominal interest rate.
C) increase in output and a decrease in the nominal interest rate.
D) decrease in output and an increase in the nominal interest rate.
If the purchasing-power parity theory is true, then:
A) the net exports schedule is very steep.
B) all changes in the real exchange rate result from changes in price levels.
C) all changes in the nominal exchange rate result from changes in price levels.
D) changes in saving or investment influence only the real exchange rate.
Suppose that Congress passes a law to permanently cut taxes starting the next year.
Assuming that consumers do not follow Ricardian equivalence, when would consumers
adjust their consumption spending according to:
a. the Keynesian consumption function?
b. the Fisher two-period model with binding borrowing constraints?
c. the random-walk hypothesis (the permanent-income hypothesis with rational
expectations) with no binding borrowing constraint?
If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS
curve for any given interest rate shifts to the right by:
A) 100.
B) 200.
C) 300.
D) 400.
If a consumer is a borrower in period one and the interest rate rises, the:
A) income and substitution effects both tend to make consumption higher in the first
period.
B) income and substitution effects both tend to make consumption lower in the first
period.
C) income effect tends to make consumption higher in the first period and the
substitution effect tends to make it lower.
D) substitution effect tends to make consumption higher in the first period and the
income effect tends to make it lower.
According to the natural-rate hypothesis, fluctuations in aggregate demand affect output
in:
A) both the short run and the long run.
B) only in the short run.
C) only in the long run.
D) in neither the short run nor the long run.
Open-market operations change the ______; changes in interest rate paid on reserves
change the ______; and changes in the discount rate change the ______.
A) monetary base; monetary base; monetary base
B) money multiplier; money multiplier; money multiplier
C) monetary base; money multiplier; monetary base
D) money multiplier; monetary base; money multiplier
According to the IS“LM model, when the government increases taxes and government
purchases by equal amounts:
A) income, the interest rate, consumption, and investment are unchanged.
B) income and the interest rate rise, whereas consumption and investment fall.
C) income and the interest rate fall, whereas consumption and interest rise.
D) income, the interest rate, consumption, and investment all rise.
The production function feature called “constant returns to scale” means that if we:
A) multiply capital by z1 and labor by z2, we multiply output by z3.
B) increase capital and labor by 10 percent each, we increase output by 10 percent.
C) increase capital and labor by 5 percent each, we increase output by 10 percent.
D) increase capital by 10 percent and increase labor by 5 percent, we increase output by
7.5 percent.
An estimate of total employment in the economy can be obtained from:
A) both the household and establishment surveys.
B) from the household survey, but not from the establishment survey.
C) from the establishment survey, but not from the household survey.
D) from neither the household nor the establishment surveys.
The interest rate determines ______ in the goods market and money ______ in the
money market.
A) government spending; demand
B) government spending; supply
C) investment spending; demand
D) investment spending; supply
International differences in income per person in accounting terms must be attributed to
differences in either ______ and/or ______.
A) factor accumulation; production efficiency
B) constant returns to scale; the marginal product of capital
C) unemployment rates; depreciation rates
D) consumption; interest rates
In the case of unions, the conflict of interest between different groups of workers results
in insiders wanting ______, while outsiders want ______.
A) more hirings; high wages
B) high wages; more hirings
C) high wages; fewer hirings
D) fewer hirings; high wages
According to the analysis underlying the Keynesian cross, when planned expenditure
exceeds income:
A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.
In the classical model, according to the quantity theory and the Fisher equation, an
increase in money growth increases:
A) output.
B) velocity
C) the nominal interest rate.
D) the real interest rate.
In the Mundell”Fleming model with a floating exchange rate, a rise in the world interest
rate will lead income:
A) and net exports both to fall.
B) to rise and net exports to fall.
C) to fall and net exports to rise.
D) and net exports both to rise.
Assume that a country’s production function is Y = K1/2L1/2.
a. What is the per-worker production function y = f(k)?
b. Assume that the country possesses 40,000 units of capital and 10,000 units of labor.
What is Y? What is labor productivity computed from the per-worker production
function? Is this value the same as labor productivity computed from the original
production function?
c. Assume that 10 percent of capital depreciates each year. What gross saving rate is
necessary to make the given capital”labor ratio the steady-state capital”labor ratio?
(Hint: In a steady state with no population growth or technological change, the saving
rate multiplied by per-worker output must equal the depreciation rate multiplied by the
capital”labor ratio.)
d. If the saving rate equals the steady-state level, what is consumption per worker?
One argument favoring a floating-exchange-rate system is that it:
A) makes international trade less difficult.
B) minimizes destabilizing speculation by international investors.
C) allows monetary policy to be used for other purposes.
D) helps prevent excessive growth in the money supply.
Assume that a bakery hires more workers and pays them wages and that the workers
produce more bread. GDP increases in all of the following cases except when the bread:
A) is sold to households.
B) is stored away for later sale.
C) grows stale and is thrown away.
D) is sold to other firms.
According to Hall, consumption spending follows a random walk and, according to the
efficient-markets model, stock prices follow a random walk.
a. What determines changes in consumption and stock prices in this case?
b. What is the implication of following a random walk for predicting changes in
consumption and stock prices?
In the Solow growth model of an economy with population growth but no technological
change, if population grows at rate n, total output grows at rate ______ and output per
worker grows at rate ______.
A) n; n
B) n; 0
C) 0; 0
D) 0; n
If net capital outflow is positive, then:
A) exports must be positive.
B) exports must be negative.
C) the trade balance must be positive.
D) the trade balance must be negative.
Assume that a war breaks out abroad, and foreign investors choose to invest more in a
large safe country, the United States. Then, the U.S. real interest rate:
A) and net exports will both fall.
B) will fall and net exports will rise.
C) will rise and net exports will fall.
D) and net exports will both rise.
Two small open economies, Fixed and Flex, can be described by the Mundell”Fleming
model. The countries are otherwise identical except that Fixed maintains a fixed
exchange rate, while Flex maintains a flexible exchange-rate regime. The governments
of both countries increase spending by the same amount. Compare what happens in the
two countries to:
a. the exchange rate
b. equilibrium output
c. net exports.