An increase in income will tend to cause which of the following?
A) an increase in the monetary base (H)
B) a reduction in H
C) an increase in the interest rate
D) a reduction in the money multiplier
E) none of the above
The evidence shows that, over the last 25 years, spending on research and development
in the rich countries has
A) decreased dramatically.
B) decreased slightly.
C) remained constant.
D) increased in absolute numbers, but decreased as a percentage of GDP.
E) increased as a percentage of GDP.
Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y – T G = 2000
a. Given the above variables, calculate the equilibrium level of output. Hint: First
specify (using the above numbers) the demand equation (Z) for this economy. Second,
using the equilibrium condition, equate this expression with Y. Once you have done
this, solve for the equilibrium level of output. Using the ZZ-Y graph (i.e., a graph that
includes the ZZ line and 45-degree line with Z on the vertical axis, and Y on the
horizontal axis), illustrate the equilibrium level of output for this economy.
b. Now, assume that consumer confidence decreases causing a reduction in autonomous
consumption (c0) from 500 to 400. What is the new equilibrium level of output? How
much does income change as a result of this event? What is the multiplier for this
economy?
c. Graphically illustrate the effects of this change in autonomous consumption on the
demand line (ZZ) and Y. Clearly indicate in your graph the initial and final equilibrium
levels of output.
d. Briefly explain why this reduction in output is greater than (in absolute terms) the
initial reduction in autonomous consumption.
For this question, assume that Y = N. Based on our understanding of the labor market
model presented in Chapter 6, we know that a reduction in the markup will cause
A) an increase in the natural level of output.
B) a reduction in the natural level of output.
C) no change in the natural level of output.
D) a reduction in the natural level of employment.
For this question, assume that expectations of P and A are correct. Now suppose that
there is a 1% increase in A. Given this information, which of the following will occur?
A) a 1% increase in the real wage and a reduction in the natural rate of unemployment
B) a 1% increase in the real wage and no change in the natural rate of unemployment
C) no change in the real wage and an increase in the natural rate of unemployment
D) no change in the real wage and a reduction in the natural rate of unemployment
A painting is currently worth $100,000, and is expected to maintain its real value for
three years. The real interest rate is expected to remain constant at 10%. What is the
present value of the painting’s expected price at the end of the third year?
A) $75,131
B) $88,899
C) $96,153
D) $100,000
E) $70,000
An increase in which of the following variables will cause an increase in the user cost
of capital?
A) rt
B) Πt
C) Πe
t
D) all of the above
E) none of the above
The intellectual leader of the monetarists was
A) Robert Lucas.
B) Milton Friedman.
C) John Maynard Keynes.
D) Paul Romer.
E) John Taylor.
Under a fixed exchange rate regime, suppose there is an increase in housing wealth that
causes an increase in consumption. This wealth-induced increase in consumption will
cause
A) an increase in investment.
B) a reduction in net exports.
C) an increase in imports.
D) all of the above
E) none of the above
The debt-to-GDP ratio is higher,
A) the lower the real interest rate.
B) the lower is the ratio of the primary deficit to GDP.
C) the higher is the growth rate of output.
D) all of the above
E) none of the above
Under a fixed exchange rate regime, the central bank must act to keep
A) P = P*.
B) the real exchange rate fixed.
C) i = i*.
D) E = 1.
E) none of the above
Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model,
graphically illustrate and explain what effect a reduction in government spending will
have on the domestic economy. In your graphs, clearly label all curves and equilibria.
The collapse of the subprime mortgage market
A) did not affect the corporate bond market.
B) increased the perceived riskiness of Treasury securities.
C) reduced the Baa-Aaa spread.
D) increased the Baa-Aaa spread.
Our model of long-run economic growth suggests that
A) the U.S. growth slowdown since 1950 has been caused largely by low saving in the
U.S.
B) a higher rate of saving in the U.S. cannot do much to increase the U.S. growth rate
over the next two decades.
C) saving in the U.S. has exceeded the golden-rule level.
D) all of the above
E) none of the above
To solve the “time inconsistency” problem in macro policy, a nation may well have to
A) restrict itself in the present from taking certain policy moves in the future.
B) lift all restrictions on future policy moves.
C) present policy moves to the public, for example, in a referendum.
D) use the courts to settle policy disputes.
E) make the central bank more responsive to the popular will.
The theories of consumption were developed by
A) Friedman and Phelps.
B) Hicks and Hansen.
C) Modigliani and Friedman.
D) Lucas and Sargent.
Which of the following represents real GDP?
A) GDP in constant dollars
B) GDP in terms of goods
C) GDP in base year dollars
D) all of the above
For this question, assume that individuals do not hold currency (i.e., c = 0). If the ratio
of reserves to deposits is .10, the money multiplier is
A) .1.
B) .9.
C) 4.
D) 5.
E) 10.
An increase in the saving rate will affect which of the following variables in the long
run?
A) output per worker
B) capital per worker
C) the level of investment
D) all of the above
Which of the following individuals is responsible for developing the permanent income
theory of consumption?
A) Friedman
B) Modigliani
C) Keynes
D) Lucas
An increase in the parameter c, the proportion of money individuals wish to hold as
currency, will tend to cause which of the following?
A) an increase in the monetary base (H)
B) a reduction in H
C) an increase in the money multiplier
D) a reduction in the money multiplier
The official measure of the deficit becomes more inaccurate as
A) the inflation rate rises.
B) the total debt falls.
C) taxes rise.
D) all of the above
E) none of the above
Analysis of macro policy and theory has resulted in of the following views?
A) There should be no constraints imposed on fiscal or monetary policy.
B) A constitutional amendment is the most appropriate method to constrain fiscal
policy.
C) The heads of the central bank should be chosen by popular elections.
D) all of the above
E) none of the above
Assume that an economy experiences both positive population growth and
technological progress. A reduction in the saving rate will cause
A) no change in K/NA.
B) a permanent reduction in the rate of growth of output per worker.
C) a permanent reduction in the rate of growth of output.
D) no change in Y/NA.
E) none of the above
Suppose that over the past decade, U.S. inflation is less than that in Mexico. Further
assume that during this same period, the dollar depreciates relative to the Mexican peso.
Given this information,
A) the real exchange rate remains unchanged.
B) the real exchange rate must decrease.
C) the real exchange rate must increase.
D) the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.
Based on the notation presented in Chapter 2, which of the following expressions
represents real GDP?
A) Yt
B) PtYt
C) Yt/Pt
D) $Yt/Pt
Banks are different from other financial intermediaries because
A) banks receive funds and make loans.
B) some of a bank’s deposits are money.
C) banks can conduct open market operations on their own.
D) banks do not need to hold reserves against their deposits.
E) banks are open longer hours.
Assume that the interest parity condition holds and that both the expected exchange rate
and foreign interest rate are constant. Given this information, a reduction in the
domestic interest rate will cause
A) a reduction in the exchange rate expected in the future.
B) a reduction in the current exchange rate.
C) greater depreciation of the domestic currency expected in the future.
D) all of the above
E) none of the above
An increase in which of the following variables will cause a reduction in the amount of
money individuals wish to hold in the current period?
A) current income
B) the current nominal interest rate
C) the current real interest rate
D) expected future income
E) all of the above
Assume the exchange rate is fixed. Using the IS-LM model, graphically illustrate and
explain what effect an increase in consumer confidence will have on the domestic
economy. In your graphs, clearly label all curves and equilibria.
In the early 1990s, which nation took the lead in driving up European interest rates?
A) Spain
B) France
C) Germany
D) England
E) none of the above
Based on our understanding of the labor market model presented in Chapter 6, we know
that a reduction in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) an increase in the natural rate of unemployment.
D) a reduction in the natural rate of unemployment and no change in the real wage.
A number of situations can arise that will cause individuals to believe that policy
makers might change the pegged value of a fixed exchange rate. Suppose financial
market participants expect a revaluation in the future. The interest parity condition will
be maintained if which of the following policy actions are taken in the current period?
A) a reduction in the pegged value of the domestic currency
B) an increase in i
C) a reduction in i
D) an increase in government spending