Macroeconomics: Policy and Practice, 2e (Mishkin)
Chapter 1 The Policy and Practice of Macroeconomics
1.1 The Practice of Macroeconomics
1) Macroeconomics is the study of ________ while microeconomics studies ________.
A) large biological systems; political implications of nanotechnology
B) the overall economic activity and prices; an individual firm, household, or market
C) an individual firm; the overall economic performance of a nation
D) the overall economic performance of the world; the economy of a single country
E) firm behavior; market behavior
2) Macroeconomics is the study of ________ while microeconomics studies ________.
A) large business enterprises; small business ventures
B) the overall household economic activity; market behavior
C) an individual firm; the overall economic performance of a nation
D) the overall economic performance of the world; the economy of a single country
E) none of the above
3) Macroeconomics is the study of ________ while microeconomics studies ________.
A) an individual firm; the overall economic performance of a nation
B) the overall economic performance of the world; the economy of a single country
C) the overall economic activity and prices; an individual firm, household, or market
D) firm choices; market behavior
E) consumer choices; government behavior
4) An endogenous variable is typically ________.
A) taken as given
B) strictly explained outside the model
C) strictly explained inside the model
D) strictly explained by data
E) strictly explained by graphical analysis
5) An endogenous variable is typically ________.
A) strictly explained inside the model
B) taken as given
C) strictly explained outside the model
D) constant inside the model
E) explained by unemployment
6) An exogenous variable is typically ________.
A) not considered in an economic model
B) only used to conduct policy analysis
C) taken as given
D) explained inside the model
E) explained by interest rates
7) Which statement is true of an exogenous variable in an economic model?
A) It has no direct relation to the endogenous variables.
B) Its value within the model cannot be changed.
C) It is often a policy variable.
D) It is explained inside the model.
E) All of the above.
8) An exogenous variable is typically ________.
A) calculated by the model
B) only used to conduct policy analysis
C) explained inside the model
D) disregarded in economic models
E) none of the above
9) A(n) ________ variable is calculated from within the model. A(n) ________ variable can
never be taken as given.
A) endogenous; endogenous
B) exogenous; endogenous
C) endogenous; exogenous
D) exogenous; exogenous
E) none of the above
10) To compare the conclusions of a model with what actually happens, historical data are
entered into the model as ________.
A) endogenous variables
B) exogenous variables
C) equations
D) predictions
E) policies
11) A simple macroeconomic model might explain how an increase in the demand for new
housing would lead to a decrease in the rate of unemployment. In such a model, which of these
variables is likely to be exogenous?
A) the quantity sold of home furnishings
B) the degree of unionization of the construction industry
C) the wage rate for unskilled workers
D) the level of tax revenues
E) the demand for concrete
12) In a macroeconomic model designed to explain why some countries grow faster than others,
which of these variables is likely to be endogenous?
A) investment
B) economic policies
C) geographic size
D) population
E) none of the above
13) In a model of the saving rate, which of these relationships is most crucial?
A) the effect of the saving rate on government spending
B) the effect of government spending on the saving rate
C) the effect of the saving rate on taxes
D) the effect of taxes on the saving rate
E) the effect of the saving rate on the real wage
14) Which of the following sequences best describes the five necessary steps to develop an
economic model in the correct order?
A) (1): Identify the endogenous variables; (2): identify the exogenous variables; (3): develop a
model; (4): compare the model with the data; (5): conduct prediction and policy analysis.
B) (1): Develop a model; (2): identify the exogenous variables; (3): identify the endogenous
variables; (4): compare the model with the data; (5): conduct prediction and policy analysis.
C) (1): Conduct prediction and policy analysis; (2): develop a model; (3): identify the
endogenous variables; (4): identify the exogenous variables; (5): compare the model with the
data.
D) (1): Conduct prediction and policy analysis; (2): compare the model with the data; (3):identify
the endogenous variables; (4): identify the exogenous variables; (5): develop a model.
E) none of the above
15) If a macroeconomist studying the causes of unemployment suspects that changes in
technology might play a role, then this macroeconomist is at which step in the process of
developing an economic model?
A) Identify the exogenous variables.
B) Identify the endogenous variables.
C) Compare the model with the data.
D) Conduct prediction and policy analysis.
E) Develop a model.
16) If a macroeconomist studying the causes of unemployment finds that, historically, changes in
technology seem to have caused between five and 15 percent of changes in unemployment, then
this macroeconomist is at which step in the process of developing an economic model?
A) Identify the exogenous variables.
B) Identify the endogenous variables.
C) Develop a model.
D) Compare the model with the data.
E) Conduct prediction and policy analysis.
17) If a macroeconomist studying the causes of unemployment asserts that a particular change in
technology will cause the rate of unemployment to decrease by ten percent, then this
macroeconomist is at which step in the process of developing an economic model?
A) Identify the endogenous variables.
B) Develop a model.
C) Compare the model with the data.
D) Identify the exogenous variables.
E) Conduct prediction and policy analysis.
18) Macroeconomic models particularly focus on the following three economic data series.
A) real GDP, the unemployment rate, and inflation
B) endogenous variables, exogenous variables, and GDP per person
C) inflation, recessions, and business cycles
D) real GDP, the employment rate, and interest rates
E) real GDP, the unemployment rate, and depressions
19) Macroeconomic models particularly focus on the following three economic data series.
A) endogenous variables, exogenous variables, and taxes
B) inflation, unemployment, and business cycles
C) nominal GDP, the employment rate, and budget deficits
D) bankruptcies, the unemployment rate, and depressions
E) none of the above
20) Real GDP measures ________.
A) the total hours the average U.S. citizen works a year
B) the percentage of income produced by workers and firms
C) how slowly interest rates grow
D) the total market value of actual goods and services produced in an economy over a year
E) how rapidly the overall level of prices is rising
21) Real GDP measures ________.
A) the total amount of income of every person and firm in the economy
B) the percentage of income produced by workers and firms
C) how rapidly the overall level of prices is rising
D) how many hours the average U.S. citizen works a year
E) how many automobiles are produced in a month
22) From 1900 to 2013, real GDP per person has had two important attributes.
A) It has grown substantially over time and there are small differences from country to country.
B) It has grown unevenly over time in the U.S. but it has grown substantially.
C) It has grown evenly over time in the U.S. and there are huge differences from country to
country.
D) It has fluctuated around a trend in the U.S. but it has not grown much for all the Southeast
Asian countries.
E) It has doubled in the U.S. but there have been many recession periods.
23) From 1900 to 2013 real GDP per person in the U.S. has ________.
A) doubled
B) grown by a factor of four
C) grown by a factor of nine
D) grown by a factor of twenty
E) declined
24) The term “business cycle” refers to ________.
A) the opening and eventual closing down of businesses
B) the rising and later declining of the purchasing power of the dollar
C) the acquiring of raw materials and ultimate selling of a finished product
D) the tendency for rich economies to be inevitably out-paced by other economies
E) the slowing and eventual accelerating of economic growth
25) What explains the rise in income in the U.S. between 1900 and 2013?
A) business cycles
B) economic growth
C) recessions
D) depressions
E) the purchasing power of the dollar
26) What explains the rise in income in the U.S. between 1900 and 2013?
A) business cycles
B) inflation
C) recessions
D) depressions
E) none of the above
27) In the Great Depression of the 1930s, the unemployment rate in the U.S. climbed to what
percentage?
A) 5
B) 10
C) 15
D) 20
E) 25
28) The unemployment rate measures, at a point in time, the ________.
A) percentage of workers who do not have a job
B) percentage of workers who do not have a job but are looking for work
C) percentage of workers who stop working
D) percentage of workers who are looking for work
E) none of the above
29) Apart from the Great Depression of the 1930s, which decade saw the largest rise in
unemployment in the U.S.?
A) 1950s
B) 1970s
C) 1980s
D) 1990s
E) 2000s
30) From 1929 to 2013, the unemployment rate in the U.S. ________.
A) has continued to grow but has always remained well above zero
B) has fluctuated around zero
C) has gone up and down but has always remained well above zero
D) has decreased in most recessions
E) has grown by a factor of four
31) Compared to other economies, the unemployment rate in the United States ________.
A) is relatively high
B) is relatively low
C) is remarkably stable
D) is neither particularly high nor low
E) varies too much for a reasonable comparison
32) A business manager who observes that prices in general keep rising might infer, correctly,
that now is a good time to ________.
A) invest to expand the business
B) raise the price of her product
C) expect an increase in business profits
D) expect a higher return on personal savings
E) all of the above
33) Up until World War II inflation in the U.S. ________.
A) remained around zero on average
B) rose and remained quite high for an extended period of time
C) has gone up and down but has always remained well above zero
D) increased by a factor of four every year
E) decreased by 30% every year
34) Economists apply the term “Great Inflation” to which decade?
A) 1930s
B) 1940s
C) 1950s
D) 1960s
E) 1970s
35) Since World War II the U.S. ________.
A) has seen a substantial decrease in the inflation rate
B) has seen frequent periods of deflation
C) has seen significant variations in unemployment
D) has seen real GDP grow slower, on average, than in the pre-war period
E) none of the above
36) Since World War II the U.S. ________.
A) has seen a substantial decrease in the inflation rate
B) has seen frequent periods of deflation
C) has seen a significant upward trend in unemployment
D) has seen a significant upward trend in real GDP
E) none of the above
37) Since World War II the U.S. ________.
A) has seen a substantial increase in the inflation rate
B) has seen less frequent periods of deflation
C) has seen a significant upward trend in real GDP
D) all of the above
E) none of the above
Figure 1.1
38) Figure 1.1 displays exogenous variables entering a model from which emerge endogenous
variables. Yet, in the five-step process to develop an economic model, the macroeconomist
specifies the endogenous variables first, then the exogenous variables. Which is the correct
sequence? Explain.
39) Assume that a high proportion of recent college graduates decides to stay in school seeking
advanced degrees, rather than confront the challenge of landing a good job in the midst of
generally high unemployment. What is the direct impact of this behavior on the unemployment
rate? In the longer term, what indirect impacts might there be on the unemployment rate?
40) Develop a simple model of inflation by identifying at least two exogenous variables and
describing, briefly, how the value of these exogenous variables will impact the rate of increase in
the overall level of prices in the economy.
41) Common sense suggests (and macroeconomists agree!) that sustained economic growth over
extended time periods is more important than the economy’s short-term fluctuations. Why, then,
do macroeconomists (and policymakers, and the general public) care so much about the business
cycle?
42) By 2010, the U.S. economy had emerged from the recession that had begun in 2007. Despite
an economic growth rate well above zero, unemployment showed little sign of declining much
below ten percent. Focusing on the definition of the unemployment rate, explain how it is
possible to have positive economic growth without declining unemployment.