Banks help mitigate the problem of adverse selection in lending by:
A) developing expertise in evaluating the business prospects of loan applicants.
B) making loans to many different types of borrowers.
C) adjusting the amount of the loan to fit the requirements of the borrower.
D) monitoring the business after a loan is made to the business.
In a large open economy, an investment tax credit raises the real interest rate, ______
the trade balance, and ______ net capital outflow.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each
and oranges cost $0.50 each. In this case, the value of GDP is:
A) 10 pieces of fruit.
B) $7.
C) $8.
D) $10.
In the Solow growth model, the assumption of constant returns to scale means that:
A) all economies have the same amount of capital per worker.
B) the steady-state level of output is constant regardless of the number of workers.
C) the saving rate equals the constant rate of depreciation.
D) the number of workers in an economy does not affect the relationship between
output per worker and capital per worker.
An LM curve shows combinations of:
A) taxes and government spending.
B) nominal money balances and price levels.
C) interest rates and income, which bring equilibrium in the market for real money
balances.
D) interest rates and income, which bring equilibrium in the market for goods and
services.
Empirical studies indicate that the rate of social return from positive ‘standing on others’
shoulders” externalities of research ______ the negative ‘stepping on toes” externalities
of research.
A) greatly exceed
B) approximately equal
C) are substantially less than
D) are only slightly less than
In the Solow growth model of Chapter 8, for any given capital stock, the ______
determines how much output the economy produces and the ______ determines the
allocation of output between consumption and investment.
A) saving rate; production function
B) depreciation rate; population growth rate
C) production function; saving rate
D) population growth rate; saving rate
The minimum wage:
A) is usually about 75 percent of the average wage earned in manufacturing.
B) raises the wages of highly skilled workers.
C) encourages master workers to take on apprentices.
D) has its greatest impact on teenage unemployment.
The LM curve shows combinations of ______ that are consistent with equilibrium in the
market for real money balances.
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances
A higher real interest rate reduces the demand for goods and services by:
A) shifting the dynamic aggregate supply curve.
B) decreasing the natural level of output.
C) increasing inflation expectations.
D) reducing investment and consumption spending.
Both models of aggregate supply discussed in Chapter 14 imply that if the price level is
lower than expected, then output ______ natural rate of output.
A) exceeds the
B) falls below the
C) equals the
D) moves to a different
To prevent banks from using excess reserves to make loans that would increase the
money supply, the Federal Reserve could conduct open-market ______ and _____ the
interest rate paid on bank reserves.
A) purchases; raise
B) purchases; lower
C) sales; raise
D) sales; lower
In the Solow growth model, an economy in the steady state with a population growth
rate of n but no technological growth will exhibit a growth rate of total output at rate:
A) 0.
B) n.
C) d.
D) (n + d).
Much of the difference in unemployment rates across Europe is attributable to
differences in:
A) short-term unemployment.
B) long-term unemployment.
C) frictional unemployment.
D) the natural rate of unemployment.
All of the following are suggested by the results of Alan Blinder’s survey of firms
except:
A) there is only one theory of price stickiness.
B) coordinating wage and price setting could improve welfare.
C) reasons for price stickiness vary by industry.
D) activist monetary policy can be used to cure recessions.
All of the following are arguments against Ricardian equivalence except:
A) consumers make consumption decisions myopically.
B) consumers are rational and forward-looking in consumption decision-making.
C) consumers are borrowing-constrained.
D) consumers do not expect future taxes to fall on them.
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then
C increases by:
A) 0.15 units.
B) 0.5 units.
C) 0.85 units.
D) 1 unit.
Centralized union wage bargaining with government intervention in Sweden gives
relatively more influence to ______, while firm-level union wage bargaining in the
United States gives relatively more influence to ______.
A) efficiency wages; sectoral shifts
B) sectoral shifts; efficiency wages
C) insiders; outsiders
D) outsiders; insiders
Both models of aggregate supply discussed in Chapter 14 imply that if the price level is
higher than expected, then output ______ natural rate of output.
A) exceeds the
B) falls below the
C) equals the
D) moves to a different
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 LM*
curve:
A) slopes upward and to the right because at a higher income a higher interest rate is
needed to increase velocity.
B) is vertical because monetary velocity is independent of the interest rate.
C) is vertical because the exchange rate does not enter into the LM* equation.
D) slopes upward and to the right because a higher exchange rate leads to a higher
income.
Assuming that technological progress increases the efficiency of labor at a constant rate
is called:
A) endogenous technological progress.
B) the efficiency-wage model of economic growth.
C) labor-augmenting technological progress.
D) the Golden Rule model of economic growth.
Purchasers of bonds issued by companies are _____ of the company, while purchasers
of shares of stock issued by a company are _____ of the company.
A) creditors; debtors
B) debtors; creditors
C) creditors; partial owners
D) partial owners; debtors
When the Fed increases the discount rate, it:
A) increases the reserve to deposit ratio (rr).
B) decreases the reserve to deposit ratio (rr).
C) is likely to increase the monetary base (B)
D) is likely to decrease the monetary base (B).
In the Solow model with technological progress, the steady-state growth rate of capital
per effective worker is:
A) 0.
B) g.
C) n.
D) n + g.
If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then
savings:
A) decreases by 0.85 units.
B) decreases by 0.15 units.
C) increases by 0.15 units.
D) increases by 0.85 units.
Assume that a small open economy gets involved in a global war, in which its
government purchases increase and the rest of the world’s government purchases also
increase. Then, for the small country, net exports:
A) will certainly decrease.
B) will certainly increase.
C) may increase or decrease.
D) will remain the same.
a. Suppose a government moves to reduce a budget deficit. Using the long-run model of
the economy developed in Chapter 3, graphically illustrate the impact of reducing a
government’s budget deficit by reducing government purchases. Be sure to label: i. the
axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and
v. the terminal equilibrium values.
b. State in words what happens to: i. the real interest rate; ii. national saving; iii.
investment; iv. consumption; and v. output.
Economist Robert Barro attributes the increase in the duration of unemployment to
______, while economist Paul Krugman attributes the increased duration to _____.
A) increased immigration of low-wage workers; tax cuts given to high-wage workers
B) contractionary monetary policy; expansionary fiscal policy
C) high marginal tax rates on the wealthy; high marginal tax rates on low-wage workers
D) expanded unemployment-insurance coverage; insufficient consumer demand
In the classical model, what adjusts to eliminate any unemployment of labor in the
economy?
A) the average price level
B) the interest rate
C) the real rental price of capital
D) the real wage
In a small open economy with perfect capital mobility, the real interest rate will always
be:
A) above the world real interest rate.
B) below the world real interest rate.
C) equal to the world real interest rate.
D) equal to the world nominal interest rate.
If price expectations are assumed to be correct, money demand is proportional to
income, and there are no international capital flows, then the mother of all models in the
Appendix to Chapter 14 corresponds to which of the following special cases?
A) classical closed economy
B) classical open economy
C) IS“LM model
D) Mundell”Fleming model with floating exchange rate
A decrease in the price level shifts the ______ curve to the right, and the aggregate
demand curve ______.
A) IS; shifts to the right
B) IS; does not shift
C) LM: shifts to the right
D) LM; does not shift
Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation
C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is:
A) 1,500.
B) 2,000.
C) 2,500.
D) 3,000.
The currency”deposit ratio is determined by:
A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).