In the short run, a favorable supply shock causes:
A) both prices and output to rise.
B) prices to rise and output to fall.
C) prices to fall and output to rise.
D) both prices and output to fall.
According to the theory of liquidity preference, tightening the money supply will
______ nominal interest rates in the short run, and, according to the Fisher effect,
tightening the money supply will ______ nominal interest rates in the long run.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
The success of the “Save More Tomorrow” program is based on the assumption that
consumers:
A) smooth consumption over their life cycles.
B) save a constant fraction of their permanent incomes.
C) require help controlling their desires for instant gratification.
D) save only their transitory incomes.
Equation: Monetary Policy Rule
it = pt + r + qp(pt ” p*t) + qY(Yt ” )
(Equation: Monetary Policy Rule) Given the monetary policy rule of the dynamic
model of aggregate demand and aggregate supply, which value of qp, the
responsiveness of nominal interest rates to inflation, would lead to inflation spiraling
out of control following a demand shock?
A) “0.15
B) 0.50
C) 1.00
D) 1.15
In the Mundell”Fleming model, if the price level falls, then the equilibrium income
A) rises and the real exchange rate appreciates.
B) rises and the real exchange rate depreciates.
C) falls and the real exchange rate appreciates.
D) falls and the real exchange rate depreciates.
A small open economy with perfect capital mobility is characterized by all of the
following except that:
A) its domestic interest rate always exceeds the world interest rate.
B) it engages in international trade.
C) its net capital outflows always equal the trade balance.
D) its government does not impede international borrowing or lending.
The IS curve shifts when any of the following economic variables change except:
A) the interest rate.
B) government spending.
C) tax rates.
D) the marginal propensity to consume.
According to the Mundell”Fleming model, in an economy with flexible exchange rates,
expansionary fiscal policy causes the exchange rate to ______ and expansionary
monetary policy causes the exchange rate to ______.
A) rise; rise
B) rise; fall
C) fall; fall
D) fall; rise
According to the sticky-price model, other things being equal, the greater the
proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output
in response to an unexpected price increase.
A) greater; increase
B) smaller; increase
C) greater; decrease
D) smaller; decrease
An increase in the price of imported goods will show up in:
A) the CPI but not in the GDP deflator.
B) the GDP deflator but not in the CPI.
C) both the CPI and the GDP deflator.
D) neither the CPI nor the GDP deflator.
Financial markets allow savers to:
A) eliminate risk.
B) indirectly provide resources for investment.
C) directly provide resources for investment.
D) avoid adverse selection.
If the money supply increases, then in the IS“LM analysis the ______ curve shifts to the
______.
A) LM; left
B) LM; right
C) IS; left
D) IS; right
A document representing an interest-bearing debt of the issuer, usually a corporation or
government, is called:
A) equity.
B) stock.
C) a bond.
D) capital.
An example of a nominal variable is the:
A) money supply.
B) quantity of goods produced in a year.
C) relative price of bread.
D) real wage.
An explanation for the slope of the IS curve is that as the interest rate increases, the
quantity of investment ______, and this shifts the expenditure function ______, thereby
decreasing income.
A) increases; downward
B) increases; upward
C) decreases; upward
D) decreases; downward
Real GDP is measured in _____ prices ____ time.
A) current; at a point in
B) current; per unit of
C) constant; at a point in
D) constant; per unit of
As firms’ profits increase during a boom, business fixed investment will increase
because:
A) the marginal product of capital falls.
B) stock-out avoidance diminishes.
C) corporate tax payments decrease.
D) the high profit levels relax financing constraints.
If a country has a high rate of inflation relative to the United States, the dollar will buy:
A) less of the foreign currency over time.
B) more of the foreign currency over time.
C) the same amount of the foreign currency over time.
D) an amount of foreign currency determined by the real exchange rate.
In the classical model with fixed output, the supply and demand for goods and services
are balanced by:
A) government spending.
B) taxes.
C) fiscal policy.
D) the interest rate.
Transitions into and out of the labor force:
A) rarely occur.
B) do not affect unemployment statistics.
C) make unemployment statistics difficult to interpret.
D) reduce the amount of frictional unemployment.
Exhibit: Keynesian Cross
(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and
expenditure are:
A) Y1 and PE1.
B) Y2 and PE2.
C) Y3 and PE3.
D) Y3 and PE4.
A debt-financed tax cut will ______ current consumption in the traditional view and
______ current consumption in the view of Ricardian equivalence.
A) increase; increase
B) increase; decrease
C) increase; not change
D) decrease; decrease
What were the mistakes of the following parties which finally led to the recession of
2008-2009?
a. Homebuyers
b. Government policymakers
c. Investment banks.
Net capital outflow in a large country:
A) rises as the real domestic interest rate rises.
B) declines as the domestic interest rate rises.
C) depends on the foreign interest rate.
D) depends only on domestic saving.
Assume that a competitive economy can be described by a constant returns to scale
(Cobb”Douglas) production function and all factors of production are fully employed.
Holding other factors constant, including the quantity of labor and technology, carefully
explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the
result of war damage) will change each of the following:
a. the level of output produced;
b. the real wage of labor;
c. the real rental price of capital;
d. capital’s share of total income.
If short-run equilibrium in the Mundell”Fleming model is represented by a graph with Y
along the horizontal axis and the exchange rate along the vertical axis, then the IS*
curve:
A) slopes downward and to the right because the higher the exchange rate, the lower the
level of net exports and, therefore, of short-run equilibrium income in the goods market.
B) is vertical because there is only one investment level that is consistent with the world
interest rate.
C) is vertical because the exchange rate does not enter into the IS* equation.
D) slopes downward and to the right because the higher the exchange rate, the higher
the level of net exports and, therefore, of short-run equilibrium income in the goods
market.
Consider two competitive economies that have the same quantities of labor (L = 400)
and capital (K = 400), and the same technology (A = 100). The economies of the
countries are described by the following Cobb”Douglas production functions:
North Economy: Y =A L.3K.7
South Economy: Y =A L.7K.3
a. Which economy has the larger total production? Explain.
b. In which economy is the marginal product of labor larger? Explain.
c. In which economy is the real wage larger? Explain.
d. In which economy is labor’s share of income larger? Explain.
Exhibit: Policy Interaction
(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest
rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that
shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal
Reserve should _____ the money supply shifting to _____.
A) increase; LM2
B) decrease; LM2
C) increase; LM3
D) decrease; LM3
If policymakers are free to analyze events as they occur and choose whatever policy
seems appropriate at the time, then this is:
A) policy by rule.
B) policy by discretion.
C) monetary policy.
D) fiscal policy.
The assumption of constant velocity in the quantity equation is the equivalent of the
assumption of a constant:
A) short-run aggregate supply curve.
B) long-run aggregate supply curve.
C) price level in the short run.
D) demand for real balances per unit of output.
Macroland is a small open economy with perfect capital mobility and a
flexible-exchange-rate system. Macroland is initially in equilibrium at the natural level
of output with balanced trade. Compare the impact of a tax cut in the short run (when
prices are fixed) and in the long run (when prices are flexible) on: (a) output, b)
consumption, (c) investment, (d) net exports, and (e) the exchange rate.
The principal economic loss when a country dollarizes is the loss of:
A) seigniorage revenue.
B) income tax revenue.
C) monetary stability.
D) a fixed exchange rate with the dollar.
If the hypothesis of hysteresis is correct and output is lost even after a period of
disinflation, the sacrifice ratio for an economy will:
A) increase.
B) decrease.
C) remain unchanged.
D) be zero.
Is real GDP a better measure of economic well being of a country than nominal GDP?
Give an explanation for your answer.
Consider a competitive economy in which factor prices adjust to keep the factors of
production fully employed and the interest rate adjusts to keep the supply and demand
for goods and services in equilibrium. The economy can be described by the following
set of equations:
Y = AKaL(1 “a)
Y = C + I + G
C = C (Y ” T)
I = I(r)
Suggest at least two policies that a government could use to increase the equilibrium
quantity of investment in the economy, and carefully explain how these policies
produce this result.
Based on the data in the table below, explain what happened to output and prices in the
economy between 2009 and 2010.
What is the main difference between the IS-LM model and the Mundell-Fleming
model? Under which standard have the world’s major economies in late-nineteenth and
early-twentieth century’s operated?
What are the economic incentives that lie behind rental firms’ investment decisions?
Does the Phillips curve relationship between unemployment and inflation hold in the
long run? Explain.
Use the model of residential investment to illustrate graphically the impact of a
hurricane that destroyed a substantial quantity of the existing housing stock (holding
other factors constant) on housing prices and the quantity of residential housing
investment. Explain your answer in words.
Keynes’s conclusion is quite different from that of Fisher’s model of consumption.
Explain how.
For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the
velocity of money remains constant, what is the change in real money balances?
List the three key properties of Keynes’s consumption functions.
Do you agree with the statement, “macroeconomics rests on the foundation of
microeconomics”? Explain.
During inflation, does a rise in shoe leather cost signify change in velocity of money?
Suppose a new technology is developed that increases investment demand in both a
closed economy and in a small open economy that are in other ways identical. Holding
other factors constant, will the quantity of investment spending increase more in the
closed economy or in the small open economy? Explain. Assume prices are flexible and
that factors of production are fully employed in both economies. Assume there is
perfect capital mobility for the small open economy.
Assume that the following model of the economy applies:
C = a + b(Y ” T)
Ifixed = c + dY
Iinventories = g + hY
Y = C + Ifixed + Iinventories + G
Write an expression for equilibrium Y in this model. If b = 0.5, d = 0.2, and h = 0.2,
what are the multipliers for G and T?
What does the intersection of the IS and LM curves show? Which quantity do both the
IS and LM models assume to be fixed?
Assume that a large open economy with a floating exchange rate is described in the
short run by the equations:
C = 0.5(Y ” T)
T = 1,000
I = 1,500 ” 250r
G = 1,500
NX = 1,000 ” 250e
C + I + G + NX = Y
M/P = 0.5Y ” 500r
M = 1,000
CF = 500 ” 250r
NX = CF
The last two equations specify that CF, net capital outflow, decreases with r, the interest
rate, and that NX, the net exports, is equal to net capital outflow. NX is also related to
the exchange rate, e, and falls when e appreciates. The price level (P) is fixed at 1.0.
Calculate short-run equilibrium values of Y, r, C, I, CF, NX, e, private saving, public
saving, and foreign saving. Foreign saving is defined here as minus NX. Check your
work by ensuring that C + I + G = Y and private saving plus public saving plus foreign
saving equals domestic investment. (Hint: As in the appendix to textbook Chapter 13,
form the IS curve from C + I + G + NX = Y, and then substitute CF for NX to get C + I
+ G + CF = Y. Combine with the LM curve and solve for Y, r, and CF and then use NX
= CF to get NX and the equation relating NX to e to get e.)