If the long-run aggregate supply curve is vertical, then changes in aggregate demand
affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.
In a short-run model of a large open economy, after net capital outflow is substituted for
net exports in the IS curve:
A) the larger the absolute value of the responsiveness of net capital outflow with respect
to the interest rate, the flatter the IS curve.
B) the larger the absolute value of the responsiveness of net capital outflow with respect
to the interest rate, the steeper the IS curve.
C) if both domestic investment and net capital outflow are very responsive to the
interest rate, they will tend to cancel each other out.
D) the slope of the IS curve depends only on the interest responsiveness of investment
and the marginal propensity to consume.
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 quantity of labor employed will move the real rental
price of capital to:
A) R1/P.
B) R2/P.
C) R4/P.
D) R5/P.
Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.
Assume that the marginal propensity to consume is unchanged, but the intercept of the
consumption function is made smaller so that at every income level saving is greater.
This will:
A) increase saving by the decrease in the intercept.
B) lead to no change in saving.
C) decrease saving by the decrease in the intercept.
D) lead to an increase in investment.
Assume that the production function is given by Y = AK0.5L0.5, where Y is GDP, K is
capital stock, and L is labor. The parameter A is equal to 10. Assume also that capital is
100, labor is 400, and both capital and labor are paid for their marginal products.
a. What is Y?
b. What is the real wage of labor?
c. What is the real rental price of capital (the amount of output paid per unit of capital)?
An increase in the money supply:
A) increases income and lowers the interest rate in both the short and long runs.
B) increases income in both the short and long runs, but leaves the interest rate
unchanged in the long run.
C) lowers the interest rate in both the short and long runs, but leaves income unchanged
in the long run.
D) lowers the interest rate and increases income in the short run, but leaves both
unchanged in the long run.
The housing price boom prior to the 2008″2009 recession was fueled by all of the
following except:
A) unusually large increases in building material costs.
B) lax lending standards.
C) government policies promoting homeownership.
D) homebuyers’ expectations of never-declining home prices.
Proponents of Ricardian equivalence argue that the relevant decision-making unit is the:
A) individual.
B) household.
C) infinitely lived family.
D) community.
If consumption depends positively on the level of real balances, and real balances
depend negatively on the nominal interest rate in a neoclassical model, then:
A) the classical dichotomy still holds.
B) a rise in money growth leads to a fall in consumption and a rise in investment.
C) a rise in money growth leads to a rise in consumption and a fall in investment.
D) a rise in money growth leads to a rise in both consumption and investment.
Based on the Phillips curve, unexpected movements in inflation are related to ______,
and based on the short-run aggregate supply curve, unexpected movements in the price
level are related to ______.
A) sticky wages; sticky prices
B) sticky prices; sticky wages
C) output; unemployment
D) unemployment; output
A measure of how fast the general level of prices is rising is called the:
A) growth rate of real GDP.
B) inflation rate.
C) unemployment rate.
D) market-clearing rate.
Exogenous variables are:
A) fixed at the moment they enter the model.
B) determined within the model.
C) the outputs of the model.
D) explained by the model.
According to the efficient markets hypothesis, stock price changes reflect ______, but
according to Keynes, stock price changes often reflect ______.
A) the inventory accelerator; changes in Tobin’s q
B) changes in the real cost of capital; financing constraints
C) changes in the underlying economic fundamentals; irrational waves of optimism or
pessimism
D) reductions in investment tax credits; the use of historical cost rather than
replacement cost in computing depreciation costs
Workers unemployed as a result of wage rigidity are:
A) actively searching for a job to match their skills.
B) not eligible to receive unemployment insurance benefits.
C) waiting for a job to become available.
D) relocating to another part of the country as a result of sectoral shifts.
In the Solow growth model of an economy with population growth but no technological
change, if population grows at rate n, then capital grows at rate ______ and output
grows at rate ______.
A) n; n
B) n; 0
C) 0; 0
D) 0; n
According to the natural-rate hypothesis, the levels of output and unemployment
depend on:
A) aggregate demand in the short run, but not in the long run.
B) aggregate demand in the long run, but not in the short run.
C) the natural rate of unemployment in the short run, but the natural rate of inflation in
the long run.
D) the natural rate of inflation in the short run, but the natural rate of unemployment in
the long run.
In a small open economy, if domestic investment exceeds domestic saving, then the
extra investment will be financed by:
A) borrowing from abroad.
B) borrowing from domestic banks.
C) the domestic government.
D) the World Bank.
City A has a total population of 10 million, of which 70 percent are adults. Assume that
20 percent of the adult population is not looking for a job and 60 percent of the
remaining adult population is employed. Compute:
a. Labor-force participation rate
b. Unemployment Rate
In Zimbabwe in the 1990s the government resorted to printing money to pay the
salaries of government employees because:
A) it was a means to avoid price controls.
B) of high rates of inflation.
C) of declining tax revenues.
D) of a need to stimulate the economy.
A statement that is generally true about capital in a large open economy is that it is:
A) perfectly mobile, and the country does not influence world financial markets.
B) perfectly mobile, and the country influences world financial markets.
C) not perfectly mobile, but the country does not influence world financial markets.
D) not perfectly mobile, but the country influences world financial markets.
The benefit of stricter capital requirements for shadow banks is _____, while the cost is
_____.
A) the end of risk-taking behavior; the development of more profitable opportunities
B) increased monitoring of risk-taking behavior; higher executive compensation
C) enhancing financial stability; impeding financial intermediation
D) lower inflation; higher unemployment
Two reasons why capital may not flow to poor countries are that the poorer countries
may:
A) have economies unlike those described by a Cobb”Douglas production function and
not be subject to diminishing returns to capital.
B) have already accumulated high levels of capital relative to labor and may already
have access to advanced technologies.
C) legally prevent the inflow of foreign capital and provide strong legal protection of
private property.
D) have inferior production capabilities and not enforce property rights.
Adverse selection may cause lenders to be offered opportunities to finance only:
A) the most desirable business ventures.
B) less desirable business ventures.
C) risk-free business ventures.
D) diversified business ventures.
If the Fed reduces the money supply by 5 percent and the quantity theory of money is
true, then output will fall 5 percent in the short run and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.
Starting from long-run equilibrium, if a drought pushes up food prices throughout the
economy, the Fed could move the economy more rapidly back to full employment
output by:
A) increasing the money supply, but at the cost of permanently higher prices.
B) decreasing the money supply, but at the cost of permanently lower prices.
C) increasing the money supply, which would restore the original price level.
D) decreasing the money supply, which would restore the original price level.
In the two-sector endogenous growth model, the fraction of labor in universities (u)
affects the steady-state:
A) level of income.
B) growth rate of income.
C) level of income and growth rate of income.
D) level of income, growth rate of income, and growth rate of the stock of knowledge.
According to the permanent-income hypothesis, if consumers receive a permanent
increase in their salary then they will:
A) save most of it in the current year.
B) spend most of it in the current year.
C) spend one half of it and save one-half of it in the current year.
D) not alter their consumption or saving in the current year.
According to the Taylor principle, for inflation to be stable, the central bank must
respond to an increase in inflation with ____ increase in the nominal interest rate.
A) no
B) an equal
C) a greater
D) a smaller
If government debt is not changing, then:
A) the economy is at long-run equilibrium.
B) the government’s budget must be balanced.
C) GDP must equal the natural rate of output.
D) capital per worker is constant.
Many economists attribute part of the recent increase in European unemployment to:
A) high birthrates.
B) slow rates of technological change.
C) generous benefits for unemployed workers.
D) increased demand for unskilled workers.
Along a short-run aggregate supply curve, output is related to unexpected movements in
the ______. Along a Phillips curve, unemployment is related to unexpected movements
in the ______.
A) price level; inflation rate
B) inflation rate; price level
C) unemployment rate; price level
D) price level; level of output
The investment spending component of GDP includes all of the following except:
A) business fixed investment.
B) net foreign investment.
C) residential investment.
D) inventory investment.
Central Bank A conducts monetary policy according to the following monetary policy
rule:
i = p + 2.0 + 0.90 (p ” 2.0) + 0.10 (Y ” 100),
and Central Bank B conducts monetary according to the following monetary policy
rule:
i = p + 2.0 + 0.10 (p ” 2.0) +0 .90 (Y ” 100),
where i is the nominal interest rate measured in percent, p is the inflation rate measured
in percent, and Y is output measured as a percentage of the natural level of output. The
economies of the two countries are otherwise identical and operate as described by the
dynamic model of aggregate demand and aggregate supply.
a. In which country will the dynamic aggregate demand curve be steeper? Explain.
b. If a positive supply shock of the same magnitude hits both countries, which country
will experience the greatest variability in output? Explain.