In recent years, the increasing relative wage of skilled labor has been mostly due to
A) a decrease in the supply of skilled labor that exceeds the decrease in demand.
B) an increase in the demand for skilled labor that exceeds the increase in supply.
C) a decrease in the supply of, and increase in the demand for, skilled labor.
D) government laws promoting the hiring of skilled labor.
E) government subsidies provided to college students.
Based on price setting behavior, which of the following will cause a reduction in the
price level?
A) an increase in productivity
B) a reduction in the nominal wage
C) a reduction in the markup
D) all of the above
E) none of the above
Decreasing returns to capital (K) implies that a 4% increase in K will cause
A) a reduction in output per worker (Y/N).
B) a reduction in K/N.
C) Y to increase by exactly 4%.
D) Y to increase by less than 4%.
E) no change in Y/N.
The capital-labor ratio will tend to decrease over time when
A) investment per worker equals saving per worker.
B) investment per worker is less than saving per worker.
C) investment per worker exceeds depreciation per worker.
D) saving per worker equals depreciation per worker.
E) output per worker exceeds capital per worker.
The policy rate is
A) determined by monetary policy.
B) a real interest rate.
C) a risk premium.
D) entering the IS equation.
A major reason to be concerned about any U.S. budget deficit is that
A) if it were maintained, it would lead to an ever-increasing debt-to-GDP ratio.
B) it would exacerbate the problem of the low U.S. saving rate.
C) under current legislation, it would lead to budget surpluses in the future.
D) if it were to increase, Ricardian equivalence will no longer hold.
E) since large deficits are associated with wars, the deficit might encourage the U.S. to
become more adventuristic in its foreign policy.
Refer to the information above. The real exchange rate (from the United States’
perspective) is
A) .625.
B) .8.
C) 1.6.
D) 2.0.
E) none of the above
For this question, assume that expected inflation is equal to the nominal interest rate. In
this situation, which of the following is correct?
A) The real interest rate is negative.
B) The real interest rate is positive.
C) The real interest rate is higher than the nominal interest rate.
D) The real interest rate is zero.
Which of the following events led to the crisis in macroeconomics and to the
development of rational expectations theory?
A) the Great Depression
B) the stock market crash of 1987
C) the stock market speculative bubble of the late 1990s
D) stagflation in the 1970s
E) large budget deficits in the 1980s
For this question, assume that one-year and two-year bonds have the same risk;
therefore, you can ignore risk here. Assuming that there is arbitrage between one-year
bonds and two-year bonds, we know that the expected rate of return on two-year bonds
A) will equal the expected rate of return from holding a one-year bond for one year.
B) will equal the expected rate of return from holding a one-year bond for two years.
C) will be larger than the expected rate of return from holding a one-year bond for one
year.
D) will be smaller than the expected rate of return from holding a one-year bond for one
year.
E) will be exactly half the rate of return on one-year bonds.
Who is best known for arguing about the long and variable lags of monetary policy?
A) Friedman
B) Keynes
C) Phillips
D) Greenspan
E) Bernanke
When switching from the “current exchange rate” method to the “purchasing power
parity” method, India’s standard of living in dollars
A) decreases.
B) remains essentially the same.
C) rises, but still remains far below that of the U.S.
D) rises almost to the level of the U.S.
E) leapfrogs over that of the U.S.
In the United States, someone is classified as unemployed if he or she
A) does not have a job.
B) does not have a job, or else has a job but is looking for a different one while
continuing to work.
C) does not have a job, has recently looked for work, and is collecting unemployment
insurance.
D) does not have a job, and is collecting unemployment insurance.
E) none of the above
The two labor markets in the “dual labor market” are
A) southern versus northern.
B) western versus eastern.
C) English speaking versus non-English speaking.
D) domestic versus foreign.
E) none of the above
The demand for money is given by Md = $Y (0.3 – i), where $Y = 120 and the supply of
money is $30.
a. What is the equilibrium interest rate?
b. If the central bank wants to decrease i by 2%, at what level should it set the supply of
money?
Based on our understanding of the IS-LM model that takes into account dynamics, we
know that a reduction in the money supply will cause
A) an immediate drop in Y and immediate increase in i.
B) an immediate increase in i and no initial change in Y.
C) a gradual increase in i and gradual reduction in Y.
D) none of the above
For this question, assume that the Fed sets monetary policy according to the Taylor rule.
Suppose current U.S. macroeconomic conditions are represented by the following: π <
π?* and u = un. Given this information, we would expect that the Fed will
A) implement a monetary contraction.
B) implement a monetary expansion.
C) maintain its current stance of monetary policy.
D) more information is need to answer this question.
When x increases
A) IS curve shifts to the left.
B) IS curve shifts to the right.
C) LM curve shifts upward.
D) LM curve shifts downward.
“Effective demand” represents which of the following?
A) money demand
B) demand for exports
C) domestic demand
D) the demand for labor
E) aggregate demand
Suppose the current level of output and the interest rate are such that the economy is
operating on neither the IS nor LM curve. Which of the following is true for this
economy?
A) Production does not equal demand.
B) The money supply does not equal money demand.
C) The quantity supplied of bonds does not equal the quantity demanded of bonds.
D) Financial markets are not in equilibrium.
E) all of the above
The Humphrey-Hawkins Act requires the Fed to promote
A) stable prices.
B) maximum employment.
C) moderate long-term interest rates.
D) all of the above
E) none of the above
Policy coordination is difficult because each country
A) prefers to be the one to increase demand.
B) prefers to be the one to appreciate its currency.
C) prefers that other countries increase their demand.
D) prefers to be the one to increase taxes.
E) prefers that other countries increase taxes.
Which of the following events will cause the interest rate to increase?
A) an open market sale of bonds
B) an increase in the reserve deposit ratio (i.e., θ)
C) an increase in income
D) all of the above
If the government runs a primary deficit in year zero of B0, and, in year 1, decides to
stabilize the debt (i.e., prevent the deficit from rising any further), then in year 1 and
beyond, it must run a primary surplus equal to
A) zero.
B) B0.
C) (1 + r)B0.
D) r.
E) none of the above
There are no questions in this chapter.
A)
B)
C)
D)
The interest rate will increase as a result of which of the following events?
A) an increase in income
B) an open market purchase of bonds by the central bank
C) a reduction in income
D) all of the above
E) none of the above
For this question, assume that interest parity holds, the future expected exchange rate is
constant, the current nominal exchange rate is 1.2, the one-year foreign interest rate is
6% and the one-year domestic interest rate is 3%. Given this information, one can
conclude that
A) financial market participants expect that the exchange rate (E) will increase by 3%
over the coming year.
B) financial market participants expect that the exchange rate (E) will decrease by 3%
over the coming year.
C) financial market participants expect that the domestic currency to depreciate by 3%
over the coming year.
D) financial market participants expect that the exchange rate (E) will increase by 20%
over the coming year.
Autonomous spending in a closed economy equals which of the following?
A) c0 + I + G – c1T
B) C + I + G
C) Z
D) c0 + I + G + c1T
The “life cycle” and “permanent income” theories of consumption share which of the
following features?
A) Consumption spending depends on income, rather than wealth.
B) Consumption spending should fluctuate widely from year to year.
C) Consumers look ahead to the future in making current spending decisions.
D) all of the above
E) none of the above
Suppose policy makers underestimate the natural rate of unemployment. In a situation
like this, policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) both A and B
D) results in steadily rising inflation.
Suppose the aggregate production function is represented by Y = AN. Which of the
following expressions represents the number of additional workers required to increase
production by one unit?
A) 1/A
B) Y/N
C) 1/N
D) 1/Y
E) none of the above
Briefly discuss new growth theory.
The yield curve indicates that the two-year interest rate will be a function of what
variables? Include in your answer an explanation of how changes in these variables will
affect the two-year interest rate.
Explain what is meant by liquidity preference.
What is the difference between deflation and disinflation?
For an economy in which there is no technological progress, explain what must occur
for the steady state to occur. Also explain what this implies about the rate of growth of
output, output per worker, and the capital stock.
What are the main rules of the Budget Enforcement Act of 1990?
Does Europe constitute an optimal common currency area? Why?
Briefly explain what effect an increase in the saving rate will have on growth.
Explain how the original Phillips curve differs from the expectations-augmented
Phillips curve (or the modified, or accelerationist Phillips curve).
Assume a country is in a fixed exchange rate regime. Now suppose that individuals
expect that policy makers will revalue its currency. Explain the various actions that
policy makers can choose in response to this expected revaluation.
What were some of the key features in terms of fiscal policy of the Stability and
Growth Pact signed in 1997 by would-be members of the Euro?
Graphically illustrate (using the WS and PS relations) and explain the effects of an
increase 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.
Explain what decisions and calculations a firm must make when it is considering the
purchase of new capital (i.e., making an investment decision).
Explain what effect a reduction in the unemployment rate will have on the real wage
based on: 1. the WS relation; and 2. the PS relation.
Graphically show and explain the effects of an improvement in the state of technology.
Explain how an increase in the unemployment rate will affect bargaining power and
nominal wages.
Explain why the Phillips curve on average is downward sloping.
Discuss the relationships among the various monetary aggregates.
What are the social and economic implications of unemployment? Explain.