The most prominent feature of the U.S. economy in the 1970s was:
A) cost-push deflation.
B) cost-push inflation.
C) demand deflation.
D) demand inflation.
Financial intermediation is the process of:
A) settling disputes between borrowers and lenders.
B) advising corporations on whether to expand using debt or equity.
C) transferring funds from savers to borrowers.
D) converting from a barter economy to a money economy.
If the real interest rate and real national income are constant, according to the quantity
theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:
A) inflation of 1 percent and the nominal interest rate of less than 1 percent.
B) inflation of 1 percent and the nominal interest rate of 1 percent.
C) inflation of 1 percent and the nominal interest rate of more than 1 percent.
D) both inflation and the nominal interest rate of less than 1 percent.
Tobin’s q equals the:
A) cost of buying and renting out one unit of capital measured in units of the economy’s
output.
B) marginal product of capital minus the cost of capital.
C) ratio of the replacement value of installed capital to the market value of installed
capital.
D) ratio of the market value of installed capital to the replacement cost of installed
capital.
a. Suppose a government decides to reduce spending and (lump-sum) income taxes by
the same amount. Using the long-run model of the economy developed in Chapter 3,
graphically illustrate the impact of the equal reductions in spending and taxes. Be sure
to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction
curves shift; and v. the terminal equilibrium values.
b. State in words what happens to: i. the real interest rate; ii. national saving; iii.
investment; iv. consumption; and v. output.
According to the life-cycle model, the average propensity to consume does not fall as
income increases in the long run because:
A) wealth and income grow together.
B) as income increases wealth decreases.
C) saving is constant over the life cycle.
D) wealth is constant over the life cycle.
The statistic used by economists to measure the value of economic output is:
A) the CPI.
B) GDP.
C) the GDP deflator.
D) the unemployment rate.
When the Federal Reserve increases the money supply, at a given price level the
amount of output demanded is ______ and the aggregate demand curve shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward
The neoclassical model of investment says investment depends negatively on the real
interest rate because an increase in the real interest rate:
A) raises the cost of capital.
B) lowers the marginal product of capital.
C) lowers the real rental price of capital.
D) slows down the speed at which net investment responds to the incentive to invest.
If the production function is y = k1/2, the steady-state value of y is:
A) y = ((s + g)/(d + n))1/2.
B) y = (s + g)/(d + n).
C) y = (2/(d + n + g))1/2.
D) y = s/(d + n + g).
Other things equal, a given change in government spending has a larger effect on
demand the:
A) flatter the IS curve.
B) steeper the IS curve.
C) larger the interest sensitivity of expenditure demand.
D) smaller the interest sensitivity of money demand.
Assume that the equilibrium in the money market may be described as M/P = 0.5Y ”
100r, and M/P equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y.
(Hint: Write the LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the
LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to
the right?
e. If M increases and P is constant, does the LM curve shift upward and to the left or
downward and to the right?
f. If P increases and M is constant, does the LM curve shift upward and to the left or
downward and to the right?
If capital grows at 3 percent per year and labor grows at 1 percent per year, and capital’s
share is 1/3 while labor’s share is 2/3, if there is no technological progress and the
neoclassical assumptions hold, the growth rate of output will be:
A) 1-1/3 percent per year.
B) 1-2/3 percent per year.
C) 3 percent per year.
D) 2-1/3 percent per year.
The Volcker rule restricts excessive risk taking by commercial banks by:
A) prohibiting banks from making certain kinds of speculative investments.
B) increasing the amount of capital banks must hold.
C) decreasing the deposit insurance coverage of depositors in commercial banks.
D) limiting the compensation that bank executives can be paid.
With the real money supply held constant, the theory of liquidity preference implies that
a higher income level will be consistent with:
A) no change in the interest rate.
B) a lower interest rate.
C) a higher interest rate.
D) first a lower and then a higher interest rate.
To end a hyperinflation, a government trying to reduce its reliance on seigniorage
would:
A) print more money.
B) raise taxes and cut spending.
C) lower taxes and increase spending.
D) lower interest rates.
All of the following are reasons for frictional unemployment except:
A) workers have different preferences and abilities.
B) unemployed workers accept the first job offer that they receive.
C) the flow of information is imperfect.
D) geographic mobility takes time.
When an economy reaches a steady state other than the Golden Rule, what actions
should the policy makers take to achieve the Golden Rule steady state when:
a. The economy begins with more capital than in the Golden Rule steady state
b. The economy begins with less capital than in the Golden Rule steady state
Assume that the LM curve for a small open economy with a fixed exchange rate is
given by Y = 200r ” 200 + 2(M/P). This IS curve is given by Y = 400 + 3G ” 2T + 3NX “
200r. The function for the net exports is NX = 200 ” 100e, where e is the exchange rate.
The price level is fixed at 1.0, the world interest rate is r* = 2.0 percent, and the
exchange rate is initially 1.0.
a. If M = 100, G = 100, and T = 100, solve for the equilibrium short-run values of Y and
NX. Is the initially given exchange rate equal to the equilibrium exchange rate?
b. If the Fed buys bonds in order to raise the money supply, will equilibrium Y increase?
When a government honors its debt obligations, this is an example of:
A) discretionary fiscal policy.
B) discretionary monetary policy.
C) a fiscal policy rule.
D) a monetary policy rule.
When a borrower uses borrowed funds to engage in activities that are detrimental to the
profitability of the business venture that was financed, there is a problem of:
A) adverse selection.
B) moral hazard.
C) systematic risk.
D) risk aversion.
In a short-run model of a large open economy with a floating exchange rate, net capital
outflow ______ as the domestic interest rate increases and is just equal to ______.
A) decreases; the increase in net exports.
B) decreases; the decrease in net exports.
C) increases; the increase in net exports.
D) increases; the decrease in net exports.
In the Mundell”Fleming model with fixed exchange rates, attempts by the central bank
to increase the money supply lead the exchange rate to fall, giving arbitrageurs the
incentive to ______ the central bank, which causes the money supply to ______.
A) sell domestic currency to; increase
B) sell domestic currency to; decrease
C) buy domestic currency from; increase
D) buy domestic currency from; decrease
In the Mundell”Fleming model with flexible exchange rates, an increase in the price
level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
An effective policy to reduce a trade deficit in a small open economy would be to:
A) increase tariffs on imports.
B) impose stricter quotas on imported goods.
C) increase government spending.
D) increase taxes.
According to the Mundell”Fleming model, import restrictions in an economy with
flexible exchange rates cause net exports to ______ and in an economy with fixed
exchange rates import restrictions cause net exports to ______.
A) increase; increase
B) increase; remain unchanged
C) remain unchanged; remain unchanged
D) remain unchanged; increase
Hyperinflations ultimately are the result of excessive growth rates of the money supply;
the underlying motive for the excessive money growth rates is frequently a
government’s:
A) desire to increase prices throughout the economy.
B) need to generate revenue to pay for spending.
C) responsibility to increase nominal interest rates by increasing expected inflation.
D) inability to conduct open-market operations.
If an earthquake destroys some of the capital stock, the neoclassical theory of
distribution predicts:
A) the real wage will rise and the real rental price of capital will fall.
B) both the real wage and the real rental price of capital will fall.
C) both the real wage and the real rental price of capital will rise.
D) the real wage will fall and the real rental price of capital will rise.
According to the traditional viewpoint of government debt, a tax cut without a cut in
government spending:
A) raises consumption in both the short run and the long run.
B) lowers consumption in both the short run and the long run.
C) raises consumption in the short run but lowers it in the long run.
D) lowers consumption in the short run but raises it in the long run.
Consider two countries that are otherwise identical (have the same saving rates and
depreciation rates), but the population of Country Large is 100 million, while the
population of Country Small is 10 million. Use the Solow model with no technological
change to compare the steady-state levels of output per worker if:
a. the population growth rates are the same in the two countries.
b. the population growth rate is higher in Country Large.
The government raises lump-sum taxes on income by $100 billion, and the neoclassical
economy adjusts so that output does not change. If the marginal propensity to consume
is 0.6, investment:
A) rises by $100 billion.
B) rises by $60 billion.
C) falls by $60 billion.
D) falls by $100 billion.