Economic research shows that ______ in explaining international differences in living
standards.
A) physical capital is more important than human capital
B) human capital is at least as important as physical capital
C) human capital is much more important than physical capital
D) infrastructure is the most important factor
The Taylor rule can be written as FF rate = p + 2.0 + 0.5 (p” 0) + 0.5(GDP gap), where
FF rate is the nominal federal funds rate, p is the inflation rate, and the GDP gap is the
percentage deviation of real GDP from its natural level. If inflation is 2 percent and
GDP is at the natural rate, then according to the Taylor rule, the Fed should set the
nominal federal funds rate at _____ percent.
A) 2
B) 3
C) 4
D) 5
Economists are able to estimate the natural rate of unemployment in the United States:
A) very precisely.
B) in a 95 percent confidence interval of 2 to 3 percentage points.
C) in a 95 percent confidence interval of 10 to 20 percentage points.
D) only in years when there are no supply shocks.
Based on the sticky-price model, the short-run aggregate supply curve will be steeper,
the greater the:
A) target nominal-wage rate.
B) target real-wage rate.
C) proportion of firms with flexible prices.
D) proportion of firms with sticky prices.
In the credit crunch during the 2008″2009 recession, banks tightened lending standards:
A) only for mortgages.
B) only for small business loans.
C) only for consumer loans.
D) for mortgages, small business loans, and consumer loans.
a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in
the interest rate on the equilibrium level of income. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the
terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the increase in
the interest rate.
Other things equal, a given change in money supply has a larger effect on demand the:
A) larger the income sensitivity of money demand.
B) smaller the income sensitivity of money demand.
C) flatter the LM curve.
D) steeper the IS curve.
The marginal product of capital is:
A) output divided by capital input.
B) additional output produced when one additional unit of capital is added.
C) additional output produced when one additional unit of capital and one additional
unit of labor are added.
D) value of additional output when one dollar’s worth of additional capital is added.
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, public saving:
A) rises by $100 billion.
B) rises by $60 billion.
C) falls by $60 billion.
D) falls by $100 billion.
Most economists believe that prices are:
A) flexible in the short run but many are sticky in the long run.
B) flexible in the long run but many are sticky in the short run.
C) sticky in both the short and long runs.
D) flexible in both the short and long runs.
When the borrower has more knowledge about the attributes of an investment project
than the lender, then the lender has a problem of:
A) adverse selection.
B) moral hazard.
C) risk aversion.
D) systematic risk.
If the LM curve is vertical and government spending rises by G, in the IS“LM analysis,
then equilibrium income rises by:
A) G/(1 ” MPC).
B) more than zero but less than G/(1 ” MPC).
C) G.
D) zero.
The tradeoff between inflation and unemployment does not exist in the long run
because people will adjust their expectations so that expected inflation:
A) exceeds the inflation rate.
B) equals the inflation rate.
C) is below the inflation rate.
D) equals the inflation rate of the previous year.
One consequence of high inflation is a(n):
A) appreciating nominal exchange rate.
B) decrease in the price of goods measured in terms of money.
C) depreciating nominal exchange rate.
D) decrease in the price of foreign currencies measured in terms of the domestic
currency.
The real wage will increase if:
A) the supply of labor increases.
B) the productivity of labor increases.
C) the price of output increases.
D) the supply of capital decreases.
A worker with two jobs is counted:
A) once in both the household and the establishment surveys.
B) once in the household survey, but twice in the establishment survey.
C) once in the establishment survey, but twice in the household survey.
D) twice in both the household and the establishment surveys.
In the Solow growth model, if investment is less than depreciation, the capital stock
will ______ and output will ______ until the steady state is attained.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
In the IS“LM model when M remains constant but P rises, in short-run equilibrium, in
the usual case the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
One possible benefit of moderate inflation is:
A) a reduction in boredom attributable to the changing prices.
B) the elimination of menu costs.
C) better functioning labor markets.
D) increased certainty about the future.
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the
short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve
is Y = 2(M/P) and M = 1,500.
a. If the economy is initially in long-run equilibrium, what are the values of P and Y?
b. If M increases to 2,000, what are the new short-run values of P and Y?
c. Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?
The purpose of the Financial Services Oversight Council, which was created by the
Dodd-Frank Act, is to:
A) replace the existing regulatory agencies with one agency to enforce all financial
regulations.
B) oversee private credit rating agencies.
C) determine appropriate levels of executive compensation for firms in the financial
system.
D) coordinate activities of the various regulatory agencies.
Common elements of financial crises include:
A) insolvencies and government corruption
B) decline in asset prices and insolvencies of financial institutions.
C) declining liquidity and low interest rates.
D) high inflation and high interest rates.
The stock-out avoidance motive for holding inventories suggests that:
A) firms hold inventories in order to produce more output.
B) when sales are low, firms produce more than they sell and put the extra goods in
inventories.
C) firms hold inventories to avoid losing sales.
D) when a product is only partly completed, its components are counted as part of the
firm’s inventory.
If the per-worker production function is y = Ak, where A is a positive constant, in the
steady state, a:
A) lower saving rate does not affect the growth rate.
B) higher saving rate does not affect the growth rate.
C) lower saving rate leads to a higher growth rate.
D) higher saving rate leads to a higher growth rate.
Suppose it is an election year and the economy is in a recession. The opposition
candidate proposes an investment tax credit to take effect next year after he takes office.
If the public believes the opposition candidate has a good chance of winning, the effect
of this promise will likely be to:
A) increase investment both this year and next year.
B) decrease investment both this year and next year.
C) increase investment this year and decrease it next year.
D) decrease investment this year and increase it next year.
According to the neoclassical model of investment, the immediate impact of a rise in
the real interest rate will be to:
A) increase the cost of capital, the rental price of capital, and the rate of investment.
B) increase the cost of capital and the rental price of capital, but to lower the rate of
investment.
C) increase the rental price of capital and the rate of investment, but to leave the cost of
capital unchanged.
D) increase the cost of capital and lower the rate of investment, but to leave the rental
price of capital unchanged.
If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the
ratio of currency to deposits, then the money supply is equal to ______ divided by
______ multiplied by B.
A) (rr + 1); (rr + cr)
B) (cr + 1); (cr + rr)
C) (rr + cr); (rr + 1)
D) (rr + cr); (cr + 1)
The study of the economy as a whole is called:
A) household economics.
B) business economics.
C) microeconomics.
D) macroeconomics.
A dislike of randomness in economic circumstances is called:
A) rational expectations.
B) risk aversion.
C) adverse selection.
D) moral hazard.
Exhibit: Policies Influence Real Exchange Rate
(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the
impact on the real exchange rate of contractionary fiscal policies at home?
A) (A)
B) (B)
C) (C)
D) (D)
If an economy moves from a steady state with positive population growth to a zero
population growth rate, then in the new steady state, total output growth will be ______
and growth of output per person will be ______.
A) lower; lower
B) lower; the same as it was before
C) higher; higher than it was before
D) higher; lower
In a Solow model with technological change, if population grows at a 2 percent rate and
the efficiency of labor grows at a 3 percent rate, then in the steady state, output per
effective worker grows at a ______ percent rate.
A) 0
B) 2
C) 3
D) 5
A favorable supply shock occurs when:
A) environmental protection laws raise costs of production.
B) the Fed increases the money supply.
C) unions push wages up.
D) an oil cartel breaks up and oil prices fall.
The Solow growth model describes:
A) how output is determined at a point in time.
B) how output is determined with fixed amounts of capital and labor.
C) how saving, population growth, and technological change affect output over time.
D) the static allocation, production, and distribution of the economy’s output.
According to the imperfect-information model, when the price level is greater than the
expected price level, output will _____ the natural level of output
A) be greater than
B) be less than
C) be equal to
D) shift the
Printing money increases inflation. The higher the inflation, the lower the real value of
debt. So why is this method not used to pay debts?
Assume that the economy is initially in short-run equilibrium at a level of output above
the natural rate. Use the IS“LM model to illustrate graphically how the levels of income
and interest rates change as the economy returns to the natural rate of output in the long
run.
Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio of Explain
the meaning of these ratios and what would happen to each of these banks if the value
of their assets fell by 6 percent.
Why do we call macroeconomics an imperfect science? Explain.
Is the sacrifice ratio a cost to reduce inflation? Explain.
Suggest three explanations for the productivity slowdown experienced since
What is an exogenous variable? Illustrate with graphs the effect of a change in the
exogenous variable on a demand and supply relationship. Mark the x-axis andy-axis
clearly.
Illustrate the short-run and long-run impact of an unexpected monetary contraction
using both the AD“AS model and the Phillips curve. Assume the economy starts at full
employment.
Explain the relationship between the marginal product of capital and the total amount of
capital. What decision should be made by production firms to maximize its profit?
Why is purchasing power parity called “the law of one price”? Explain.
What is the difference between sticky prices and flexible prices? Explain.
Which production function is suggested by economists to see what variables influence
the equilibrium rental price? Explain.
Spending more than earning will always cause a deficit in the budget and is always
considered a bad thing. Is there a possibility that a budget deficit in any economy can
have some advantages, too? Give two examples of these advantages, if any.
What is consumption smoothing?
By definition, ‘shadow banks are a diverse set of financial institutions that perform
some functions similar to banks, but do so outside the regulatory system that applies to
traditional banking.” In the recession of 2008, the government financially rescued many
shadow banks. Was this a moral hazard? If yes, then why did the government do this?
The monetary base of Moneyland is $500 million. The current-deposit ratio (cr) is 0.2
and reserve-deposit ratio (rr) is 0.2. Calculate the money multiplier and money supply.
What is active labor market policy? Give some examples of active labor market policies
that help in reducing the unemployment rates.