Based on our understanding of the paradox of saving, we know that a reduction in the
desire to save will cause
A) an increase in equilibrium GDP.
B) a reduction in GDP.
C) an increase in the desire to invest.
D) no change in equilibrium GDP.
E) a permanent reduction in the level of saving.
Consumption is most likely to respond one-for-one with changes in current income
when
A) the change in current income results from a one-time bonus.
B) people believe the change in their current income is temporary.
C) people are able to borrow as much as they wish, as long as they pay it back.
D) the change in current income is caused by the business cycle.
E) none of the above
In the United States, presidential elections occur every four years. If a political business
cycle exists in the United States, in which year of a presidential term, all else fixed,
would we expect output growth to be lowest?
A) the first or second year
B) the second or third year
C) the third or fourth year
D) the fourth year
If the output is too high, to achieve the medium run equilibrium, the central bank will
A) increases policy rate.
B) reduces policy rate.
C) increase money supply.
D) increases inflation rate.
Which of the following conditions must be satisfied for the demand for domestic goods
to be equal to the domestic demand for goods?
A) X = εIM
B) X = 0
C) G – T = 0
D) S = I
E) X = IM/ε
Assume that an economy experiences both positive population growth and
technological progress. Once the economy has achieved balanced growth, we know that
output (Y) is
A) constant.
B) growing at a rate of gA + gN.
C) growing at a rate of gN.
D) growing at a rate of gA.
E) growing at a rate of gA – gN.
Which of the following represents a dimension of technological progress?
A) larger quantities of output for given quantities of capital and labor
B) better products
C) a larger variety of products
D) new products
E) all of the above
When x decreases
A) IS curve shifts to the left.
B) IS curve shifts to the right.
C) LM curve shifts upward.
D) LM curve shifts downward.
Suppose there is a simultaneous fiscal expansion and monetary expansion. We know
with certainty that
A) output will increase.
B) output will decrease.
C) the interest rate will increase.
D) the interest rate will decrease.
E) both output and the interest rate will increase.
For this question, assume that the economy is initially operating at the natural level of
output. A reduction in taxes will cause
A) an increase in the real wage in the medium run.
B) a reduction in the real wage in the medium run.
C) no change in the nominal wage in the medium run.
D) ambiguous effects on the real wage in the medium run.
E) none of the above
Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the
economy is initially operating at the natural level (i.e., Y = Yn). Suppose fiscal policy
makers increase taxes. This fiscal contraction will cause which of the following?
A) The real exchange rate will be permanently higher in the medium run.
B) The real exchange rate will be permanently lower in the medium run.
C) The effects of this devaluation on the real exchange rate will be ambiguous in the
medium run.
D) The real exchange rate will be unchanged in the medium run.
E) none of the above
When individuals make decisions about how much money and bonds to hold, which of
the following variables affects those decisions?
A) the real interest rate only
B) the nominal interest rate only
C) the expected inflation rate only
D) either the real interest rate or the expected inflation rate
E) both the nominal and real interest rates
Suppose the yield curve is initially horizontal. Suppose the current one-year interest rate
increases by 4% while the expected future one-year interest rate does not change.
Which of the following will tend to occur?
A) i2t will increase by 4%
B) i2t will increase by 2%
C) i2t will increase by less than 2%
D) i2t will decrease by 2%
One of the most important areas of disagreement among macroeconomists today is over
A) the slope of the IS curve.
B) the slope of the LM curve.
C) the definition of consumption spending.
D) the definition of government spending.
E) none of the above
In the IS-LM-PC model, LM curve is
A) flat.
B) upward sloping.
C) downward sloping.
D) vertical.
Which of the following is a reason that consumption depends on current income, and
not just on total wealth?
A) Banks will not always lend money to those who want to consume more than their
income.
B) The anticipation of future financial distress makes some people reluctant to borrow.
C) Low income people may prefer to postpone some consumption until later years,
when their incomes are higher.
D) all of the above
E) none of the above
In the medium run, a reduction in inflation causes
A) a reduction in the opportunity cost of holding money.
B) an increase in the opportunity cost of holding money.
C) no change in the opportunity cost of holding money.
D) individuals to switch from holding money to bonds and reduce their real money
balances.
Suppose the Phillips curve is represented by the following equation: πt – πt-1 = 20 – 2ut.
Given this information, we know that the natural rate of unemployment in this economy
is
A) 10%.
B) 20%.
C) 6.5%.
D) 5%.
E) none of the above
One of the reasons macroeconomists have concerns about inflation is that inflation
causes
A) real GDP to rise.
B) nominal GDP to fall.
C) wages to rise as fast as prices.
D) real GDP to exceed nominal GDP.
E) none of the above
When E increases by 5%, we know that
A) a real appreciation will occur if P decreases by 5%.
B) a real depreciation will occur if P also increases by 5%.
C) a nominal appreciation will occur.
D) a nominal depreciation will occur.
Which of the following is not an example of the issue of time inconsistency?
A) a central bank announced to maintain low inflation and at the same time increased
money supply
B) a government stated that they will not negotiate with hostage takers. When someone
is taken hostage, it negotiates
C) a mom says to her kids no cookie before meals and she never gives cookies before
her kids eat their meals
D) a person on diet eats ice cream for dinner
In a small country, the effect of a given change in government spending
A) on output is large and the effect on the trade balance is small.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is small.
D) on output is small and the effect on the trade balance is large.
Which of the following will cause aggregate private spending to decrease?
A) a reduction in government spending
B) an increase in expected future interest rates
C) an increase in expected future taxes
D) all of the above
E) none of the above
Assume that the current exchange rate between U.K. pound and the U.S. dollar is 2 (E =
2.0). If interest parity holds, and the U.S. interest rate is 6% while the U.K. interest rate
is 8%, the expected exchange rate in one year is
A) 1.98.
B) 1.99.
C) 2.01.
D) 2.02.
E) 2.04.
Assume the interest parity condition holds and that individuals expect the dollar to
appreciate by 5% during the coming year. Given this information, we know that
A) the interest rate differential between the two countries is less than 5%.
B) i < i*.
C) i = i*.
D) individuals will only hold foreign bonds.
E) none of the above
In an open economy under flexible exchange rates, a reduction in the interest rate will
cause a reduction in which of the following?
A) investment
B) the exchange rate, E
C) net exports
D) all of the above
E) none of the above
Suppose an economy experiences an increase in technological progress. This increase in
technological progress will
A) allow more output to be produced with the same number of workers.
B) allow the same amount of output to be produced with fewer workers.
C) lead to changes in the types of goods produced.
D) all of the above
E) none of the above
Data for which country were first used to illustrate the relationship between
unemployment and inflation (i.e., the original Phillips curve)?
A) France
B) United States
C) Canada
D) Germany
E) none of the above
Policy makers can select from a number of different exchange rate regimes. One of
those options is a “hard peg.” Which of the following best represents a hard peg?
A) a revaluation
B) a currency board
C) a flexible exchange rate regime
D) the EMS
E) none of the above
Assume the interest parity condition holds and that initially i = i*. A reduction in the
domestic interest rate will cause
A) an increase in the demand for the domestic currency.
B) a reduction in E.
C) an expected depreciation of the domestic currency.
D) all of the above
Investment depends on
A) current profit.
B) present value of of expected future profits.
C) user cost of capital.
D) all of above
E) both A and B
In the OECD countries, there is a negative relationship between output per capita in
1950 and
A) growth since 1950.
B) output per capita in the 1990s.
C) distance from the equator.
D) population.
E) none of the above
Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the
economy is initially operating at the natural level (i.e., Y = Yn). Suppose fiscal policy
makers increase government spending. This fiscal contraction will cause which of the
following?
A) The real exchange rate will be permanently higher in the medium run.
B) The real exchange rate will be permanently lower in the medium run.
C) The effects of this devaluation on the real exchange rate will be ambiguous in the
medium run.
D) The real exchange rate will be unchanged in the medium run.
E) none of the above
When the production function is represented by Y = NA, labor productivity is
represented by which of the following expressions?
A) 1/A
B) NA
C) A/Y
D) Y/A
E) none of the above
Which of the following schools of thought advised against fine-tuning, due to our
limited understanding of the economy?
A) Monetarist
B) Keynesian
C) New Keynesianism
D) New growth
E) Neoclassical