Along an aggregate demand curve, which of the following are held constant?
A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and
domestic national saving equals $25 billion, then net capital outflow equals:
A) “$25 billion.
B) “$10 billion.
C) $10 billion.
D) $25 billion.
Money’s liquidity refers to the ease with which:
A) coins can be melted down.
B) illegally obtained money can be laundered.
C) loans can be floated.
D) money can be converted into goods and services.
Which of the following rankings (from most severe to least severe) best captures the
degree of hardship associated with various types of unemployment?
A) discouraged worker, short term, long term
B) involuntarily part time, job leavers, job losers,
C) job losers, job leavers, marginally attached
D) job leavers, involuntary part time, discouraged workers
If the velocity of money varies a great deal, steady growth of the money supply is a(n):
A) ineffective way to stabilize aggregate demand.
B) example of discretionary monetary policy.
C) automatic stabilizer.
D) active policy rule.
Real money balances equal the:
A) sum of coin, currency, and balances in checking accounts.
B) amount of money expressed in terms of the quantity of goods and services it can
purchase.
C) number of dollars used as a medium of exchange.
D) quantity of money created by the Federal Reserve.
With population growth at rate n but no technological change, the Golden Rule steady
state may be achieved by equating the marginal product of capital (MPK):
A) net of depreciation to n.
B) to n.
C) net of depreciation to the depreciation rate plus n.
D) to the depreciation rate.
Since 1960, the U.S. ratio of labor income to total income has:
A) been about 2.5 to 1.
B) been about 0.7.
C) increased steadily.
D) decreased steadily.
An increase in income generated by an increase in the country risk premium will not
occur if there is a(n) ______ sufficient to offset the decline in the demand for money
caused by the higher risk premium.
A) increase in the money supply
B) decrease in government spending
C) increase in the price level caused by more expensive imports
D) fall in the price level caused by less expensive imports
The real interest rate at which, in the absence of any shock, the demand for goods and
services equals the natural rate of output is called the _____ rate of interest.
A) ex ante
B) ex post
C) natural
D) nominal
Assume that the LM curve for a small open economy with a floating exchange rate is
given by Y = 200r ” 200 + 2(M/P), while the IS curve is Y = 400 + 3G ” 2T + 3NX ”
200r. The function for NX is NX = 200 ” 100e, where e is the exchange rate. The price
level (P) is fixed at 1.0. The international interest rate is r* = 2.5 percent.
a. Using the LM curve, find the equilibrium level of Y in the small open economy, if M
= 100.
b. Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of
NX?
c. If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?
All of the following are a stock except:
A) a consumer’s wealth.
B) the government budget deficit.
C) the number of unemployed people.
D) the amount of capital in the economy.
Provide one example from the 2008″2009 financial crisis of how the following types of
policies were used to respond to the crisis:
a. conventional monetary and fiscal policy,
b. lender of last resort,
c. injections of government funds.
The percentage of a year’s real GDP that must be foregone to reduce inflation by 1
percentage point is called the:
A) NAIRU.
B) short-run Phillips curve.
C) sacrifice ratio.
D) Okun’s law.
If the demand for money depends on the nominal interest rate, then via the quantity
theory and the Fisher equation, the price level depends on:
A) only the current money supply.
B) only the expected future money supply.
C) both the current and expected future money supply.
D) neither the current nor the expected future money supply.
With a Cobb”Douglas production function, the share of output going to labor:
A) decreases as the amount of labor increases.
B) increases as the amount of labor increases.
C) increases as the amount of capital increases.
D) is independent of the amount of labor.
Examination of data from households shows that households with high current income
______ than do households with low current income.
A) consume less
B) save less
C) save a smaller fraction of current income
D) save a larger fraction of current income
According to the neoclassical model of investment, the immediate impact of an
earthquake that destroys part of the capital stock will be to:
A) increase the cost of capital, the rental price of capital, and the rate of investment.
B) increase the rental price of capital and the rate of investment, but to leave the cost of
capital unchanged.
C) increase the rental price of capital and the cost of capital, but to leave the rate of
investment unchanged.
D) increase the rental price of capital and the rate of investment, but to decrease the cost
of capital.
Exhibit: Rental Price of Capital
(Exhibit: Rental Price of Capital) Based on the graph, if the capital market is initially in
equilibrium at A with real rental price R3/P and capital stock K2, then holding other
factors constant, an increase in the capital stock to K3 will change the real rental price
of capital to:
A) R1/P.
B) R2/P.
C) R4/P.
D) R5/P.
If the real exchange rate decreases, then net exports will _____.
A) be positive.
B) be negative.
C) increase.
D) decrease.
If Central Bank A cares only about keeping the price level stable and Central Bank B
cares only about keeping output at its natural level, then in response to an exogenous
increase in the price of oil:
A) both Central Bank A and Central Bank B should increase the quantity of money.
B) Central Bank A should increase the quantity of money whereas Central Bank B
should keep it stable.
C) Central Bank A should keep the quantity of money stable whereas Central Bank B
should increase it.
D) both Central Bank A and Central Bank B should keep the quantity of money stable.
Other things being equal, the neoclassical model of investment predicts that net
investment will increase when the:
A) marginal product of capital falls.
B) price of new capital goods rises.
C) real interest rate falls.
D) depreciation rate rises.
The banking system creates:
A) liquidity.
B) wealth.
C) reserves.
D) currency.
Financial intermediaries that sell shares to savers and use their funds to buy diversified
pools of assets are called:
A) pension funds.
B) insurance companies.
C) mutual funds.
D) commercial banks.
In the specification of adaptive expectation used in the dynamic model of aggregate
demand and aggregate supply, at time t the expected inflation rate at time t + 1 is:
A) pt ” 1.
B) pt.
C) pt + 1.
D) pt + 2.
If a city passes laws limiting rents on apartments but promises to exempt buildings not
yet built:
A) construction of new buildings will not be discouraged.
B) construction of new buildings may be discouraged.
C) builders will not expect the city to renege on its promise.
D) the city will have no incentive to renege on its promise.
Exhibit: Saving, Investment, and the Interest Rate 2
(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in
equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals
desired investment, I1. What will be the new equilibrium combination of real interest
rate, saving, and investment if there is a technological innovation that increases the
demand for investment goods?
A) Point A
B) Point B
C) Point C
D) Point D
Under a fixed system, the exchange rate:
A) fluctuates in response to changing economic conditions.
B) is maintained at a predetermined level by the central bank.
C) is changed at regular intervals by the central bank.
D) fluctuates in response to changes in the price of gold.
If the monetary base equals $400 billion and the money multiplier equals 2, then the
money supply equals:
A) $200 billion.
B) $400 billion.
C) $800 billion.
D) $1,000 billion.
The unemployment rate in the United States since 1952 has:
A) never been close to zero.
B) gravitated toward a steady-state rate of zero.
C) remained constant from year to year.
D) equaled the natural rate of unemployment in every year.
To maintain a fixed-exchange-rate system, if the exchange rate moves below the
fixed-exchange-rate level, then the central bank must:
A) buy foreign currency.
B) sell foreign currency from reserves.
C) raise taxes.
D) decrease government spending.
In the dynamic model of aggregate demand and aggregate supply, changes in the
natural level of output change:
A) the DAD curve, but not the DAS curve.
B) the DAS curve, but not the DAD curve.
C) both the DAD curve and the DAS curve.
D) neither the DAD nor the DAS curve.
Cass was paid $500 in social security from the government. Though it was expenditure
made by the government, it is not included in the G component of GDP. Explain why.
The firms and workers in Alpha form expectations adaptively. The firms and workers in
Omega form expectations rationally. Their otherwise identical economies are initially in
equilibrium at the natural level of output with 10 percent inflation. The central banks of
both Alpha and Omega make credible commitments to reduce the growth rates of
money until they achieve 2 percent inflation. Compare and contrast the adjustment
process to the new equilibrium at the lower rate of inflation in both countries.
Evaluate the rate of saving to determine the policies that could promote growth. What
can be the forms of capital other than the traditional ones to promote growth of an
economy?
Assume an economy with zero interest and inflation rates. Also assume that the theory
of Ricardian equivalence is correct, i.e. people are rational and practice foresight. How
will people’s consumption pattern change if the current tax system is replaced with a
lifetime one-time tax?
What is meant by the “cold turkey solution” to inflation?
What are the benefits of a well-functioning financial system? What are the costs of a
financial crisis?
Assume that a car-rental company buys cars for $20,000 each and rents them out to
other businesses. The company faces a nominal interest rate of 10 percent per year, and
car prices are rising at 6 percent per year. If cars depreciate at 30 percent per year, what
will be the company’s cost of capital per car?
Describe the relationship between the business fixed investment and interest rate in an
investment function.
Reducing the natural rate of unemployment requires reducing the rate of job separation
and increasing the rate of job finding. Explain at least one policy that will impact each
of these aspects of the natural rate of unemployment.
*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 net national product, national
income, personal income, and disposable personal income?
What is the difference between convergence and conditional convergence with respect
to predictions of the Solow growth model? Explain.
One senator criticizes the government for making an inadequate effort to stimulate the
economy based on data from the BLS establishment survey that shows the number of
jobs in the economy has fallen. Another senator counters that the number of employed
workers in the economy has increased over the same period, based on the BLS
household survey. Explain how both senators can be correct.
Explain the concepts of shocks in aggregate demand and aggregate supply.
The people of Country A believe that their regulators are committed to a zero inflation
policy while the people of Country B do not believe that their regulators are committed
to a zero inflation policy. What difference does this make if regulators of both the
countries announce a policy that will lower inflation?
Compare the predicted impact of an increase in the money supply in the liquidity
preference model versus the impact predicted by the quantity theory and the Fisher
effect. Can you reconcile this difference?
“Some economists believe that the large decline in the money supply was the primary
cause of the Great Depression of the 1930s.” Explain how this can be the case.
Does the public’s expectation of any policy affect the outcome of implementation of the
policy?
If inflation is bad, why isn’t deflation good? Use the IS“LM model to explain how
deflation could result in a contraction in output.
Why does the real rental price of capital adjust?