Because expected inflation is typically positive, we know that
A) the nominal interest rate is generally less than the real interest rate.
B) the real interest rate is generally less than the nominal interest rate.
C) the nominal and real interest rates are generally equal.
D) the real interest rate is approximately equal to zero.
If the exchange rate between the dollar and the pound (the pound price of the dollar) is
currently 1.50, and is expected to be 1.35 in one year, then the expected rate of
A) depreciation of the dollar is 10%.
B) depreciation of the dollar is 15%.
C) appreciation of the dollar is 10%.
D) appreciation of the dollar is 15%.
E) none of the above
Refer to the information above. Given this information, the steady state rate of growth
of Y/NA is
A) 0.
B) 2%.
C) 3%.
D) 5%.
E) 16%.
An open economy with a low saving rate (private and public) must have
A) low investment only.
B) high investment only.
C) a trade surplus only.
D) low investment or a trade deficit.
E) low investment or a trade surplus.
Which of the following statements about the United States during the twentieth century
is correct?
A) Output growth has been approximately equal to employment growth.
B) Output growth has been slower than employment growth.
C) Output growth has been faster than employment growth.
D) Output has increased largely due to monetary and fiscal policy.
E) Output has decreased largely due to monetary and fiscal policy.
Suppose a bond promises to make a single payment at maturity. These types of bond are
called
A) junk bonds.
B) indexed bonds.
C) corporate bonds.
D) discount bonds.
E) constant maturity bonds.
Convergence of output per capita across countries has come from
A) a convergence of saving rates.
B) a convergence of the accumulation of capital.
C) higher technological progress from the countries that started behind.
D) all of the above
Which of the following statements is consistent with a given (i.e., fixed) LM curve?
A) A reduction in the interest rate causes investment spending to increase.
B) A reduction in the interest rate causes money demand to decrease.
C) A reduction in the interest rate causes an increase in the money supply.
D) An increase in output causes an increase in demand for goods.
E) An increase in output causes an increase in money demand.
The existence of inflation does which of the following?
A) reduces tax distortions
B) reduces shoe-leather costs
C) allows for the possibility of negative real interest rates
D) reduces the costs associated with money illusion
Net national product (NNP) is equal to
A) personal income minus taxes.
B) GNP minus consumption of fixed capital.
C) GDP plus consumption of fixed capital.
D) national income plus consumption of fixed capital.
For this question, assume that policy makers are pursuing a fixed exchange rate regime
and that output is initially greater than the natural level of output. The economy will
tend to move toward the natural level of output when which of the following occur?
A) an increase in the price level
B) a devaluation of the currency
C) a reduction in the domestic interest rate
D) an increase in the foreign price level
E) none of the above
What is the major reason for oil price to go up in the 2000s?
A) formation of the OPEC
B) fast of growth of emerging economies
C) new energy
D) higher demand from the US
The reduction in stock prices will have the most direct effect on which of the following
types of wealth?
A) financial wealth
B) housing wealth
C) human wealth
D) none of the above
An increase in the minimum wage will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Which of the following is true when a county is experiencing a trade deficit (NX < 0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) A budget deficit exists.
The IS curve becomes steeper when
A) government spending is relatively small.
B) the income tax rate in the current period is relatively small.
C) current changes in the real interest rate cause large changes in current real output.
D) changes in the current real interest rate cause small changes in current demand.
E) none of the above
Assume an economy experiences an increase in productivity that occurs as a result of
the more efficient use of existing technologies. Given this information, we would
expect which of the following to occur?
A) aggregate demand would not change
B) aggregate demand would shift to the right
C) aggregate demand would shift to the left
D) both the aggregate demand and aggregate supply curves would shift to the left
The price setting equation is represented by the following: P = (1 + m)W. When there is
perfect competition, we know that m will equal
A) W.
B) P.
C) 1.
D) W/P.
E) none of the above
Suppose two countries make a credible commitment to fix their bilateral exchange rate.
In such a situation, we know that
A) the uncovered interest parity condition no longer holds.
B) the real exchange rate must be constant as well.
C) each country can freely allow its interest rate to diverge from that of the other
country.
D) the interest rate in the two countries must be equal.
E) neither country will run a trade deficit.
Which of the following does not represent real GDP?
A) GDP in current dollars
B) GDP in terms of goods
C) GDP in base year dollars
D) GDP in constant dollars
In 2014, output per capita in the United States was approximately equal to
A) $15,500.
B) $25,800.
C) $43,800.
D) $54,592.
A reduction in the marginal propensity to import will cause
A) the ZZ line to become flatter and a given change in government spending (G) to
have a larger effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending (G) to
have a smaller effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending (G) to
have a larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending (G) to
have a smaller effect on domestic output.
For this question, suppose the domestic interest rate is 4% and that the foreign interest
rate is 7%. And finally, assume that the domestic currency is expected to depreciate by
3% during the coming year. Given this information, we know that
A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) the interest parity condition holds.
For this question, assume that individuals form expectations of inflation according to
the following equation πe
t = θπt-1. From 1970 on, the value of θ for this equation
A) increased over time and approached 1.
B) decreased over time and approached zero.
C) remained constant at zero.
D) remained constant at negative one.
E) none of the above
Once people believe the Fed’s commitment to keep unemployment at the natural rate,
the Fed can reduce unemployment below the natural rate
A) in both the short run and the long run.
B) in both the short run and the long run, but only after changing peoples’ expectations.
C) in the long run, but not the short run.
D) in the short run, but not in the long run.
E) none of the above
Graphically illustrate and explain the effects of a decrease in the rate of depreciation (δ)
on the Solow growth model. In your graph, clearly label all curves and equilibria.
Suppose the Fed reduces the money supply in the current period with no other policy
change implemented or anticipated. This policy action will cause which of the
following shifts in the IS and/or LM curves in the current period?
A) IS left; LM up
B) IS right; LM up
C) no shift in IS; LM up
D) IS left; LM down
E) IS right; LM down
The money supply will tend to fall when which of the following occurs?
A) a central bank sale of bonds
B) a decrease in the ratio of reserves to deposits
C) a shift in public preferences away from currency to checkable deposits
D) all of the above
E) none of the above
Suppose a country that has been pegging its currency is faced with a situation where
financial market participants now expect some future revaluation. In such a situation,
we would generally expect which of the following to occur?
A) an increase in the domestic interest rate
B) an announcement by the central bank that a large revaluation will occur in the near
future
C) an increase in demand for the country’s currency
D) all of the above
E) none of the above
An increase in the domestic one-year interest rate expected to occur in, say, two years
will, all else fixed, have which of the following effects in a flexible exchange rate
regime?
A) The real exchange rate will increase with no change in the nominal exchange rate.
B) The nominal exchange rate will increase with no change in the real exchange rate.
C) Both the real and nominal exchange rate will increase.
D) No change in either the nominal or real exchange rate.
Which of the following events would likely cause the largest reduction in current
consumption?
A) a permanent reduction in annual salary of $2000
B) a one-time tax increase of $4000
C) a one-time reduction in income (e.g. a bonus) of $4000
D) both B and C
Graphically illustrate and explain the effects of a decrease in the saving rate on the
Solow growth model. In your graph, clearly label all curves and equilibria.
Explain why exchange rates are more volatile than is suggested by the relatively simply
interest parity condition presented earlier in the course.
Explain the difference between fully funded social security system and pay-as-you-go
social security system.
Explain what factors determine the slope of the required investment line.
Suppose the economy is initially operating above the natural level of output. In a fixed
exchange rate regime, explain how the economy will adjust to this situation.
Explain in detail what effect a Fed purchase of bonds will have on: 1. the LM curve;
and 2. the IS curve.
Graphically illustrate and explain what effect a sale of bonds by the Federal Reserve
will have on the money market.
Suppose the interest parity condition holds. Also assume that the one-year interest rate
in the United States is 6% and that the one-year interest rate in Canada is 5%. What
does this imply about the current versus future expected exchange rate (for the U.S. and
Canadian dollars)? Explain.
Explain the three distinct notions of openness.
Recent research up to the crisis proceeded mainly on three fronts. Discuss each of them.
First, provide a brief explanation of what the unemployment rate measures. Second,
explain how changes in each of the components of the unemployment rate can cause
changes in the unemployment rate.
Explain how a reduction in the proportion of contracts that are indexed affects the
relationship between changes in the unemployment rate and inflation.
Assume expectations of both prices and productivity are accurate,use the PS/WS
relations, graphically illustrate and explain the effects of an increase in the productivity
on the natural rate of unemployment.
What are the differences between the real exchange rate and nominal exchange rate?
Explain.
A fiscal expansion (e.g. a tax cut) will result in an increase in income, an increase in
money demand, and an increase in the equilibrium interest rate in financial markets.
Explain what happens to the position of the LM curve as policy makers pursue
expansionary fiscal policy.
Use the IS-LM model to answer this question. Suppose there is a simultaneous increase
in government spending and increase in the money supply. Explain what effect this
particular policy mix will have on output and the interest rate. Based on your analysis,
do we know with certainty what effect this policy mix will have on investment?
Explain.
Graphically illustrate (using the WS and PS relations) and explain the effects of a
reduction in the minimum wage on the equilibrium real wage, the natural rate of
unemployment, the natural level of employment, and the natural level of output.
Graphically illustrate (using the WS and PS relations) and explain the effects of a
reduction in the markup on the equilibrium real wage, the natural rate of
unemployment, the natural level of employment, and the natural level of output.
Suppose the interest parity condition holds and that the domestic interest rate is less
than the foreign interest rate. What does this imply about the current versus future
expected exchange rate? Explain.