According to the classical dichotomy, when the money supply decreases, _____ will
decrease.
A) real GDP
B) consumption spending
C) the price level
D) investment spending
If there is a fixed-exchange-rate system, then in the long run:
A) the nominal exchange rate is fixed, but the real exchange rate is free to vary.
B) the real exchange rate is fixed, but the nominal exchange rate is free to vary.
C) both the nominal and real exchange rates are fixed.
D) the nominal and real exchange rates vary by a fixed amount.
The classical dichotomy:
A) cannot hold if money is “neutral.”
B) is said to hold when the values of real variables can be determined without any
reference to nominal variables or the existence of money.
C) fully describes the world in which we live, especially in the short run.
D) arises because money depends on the nominal interest rate.
When Henry Ford paid his workers $5 per day when the prevailing wage was between
$2 and $3 a day:
A) it greatly increased his company’s costs.
B) workers reduced their work efforts because they felt they “had it made.”
C) Ford proved the efficiency-wage theory was wrong.
D) it raised the efficiency of his workers.
If the nominal interest rates in the United States and Canada are 8 percent and 12
percent, respectively, the real interest rates are the same, and the real exchange rate is
fixed, then the market’s expectation about the number of Canadian dollars to be
received for a U.S. dollar a year from now will be that it will:
A) decrease by 8 percent.
B) decrease by 4 percent.
C) increase by 4 percent.
D) increase by 5 percent.
When the central bank lends to financial institutions in the midst of a liquidity crisis,
the central bank is acting as a:
A) lender of last resort.
B) shadow bank.
C) investment bank.
D) mutual fund.
The theory of liquidity preference implies that the quantity of real money balances
demanded is:
A) negatively related to both the interest rate and income.
B) positively related to both the interest rate and income.
C) positively related to the interest rate and negatively related to income.
D) negatively related to the interest rate and positively related to income.
According to the macroeconometric model developed by Data Resources Incorporated,
if taxes are increased by $100 billion, but the money supply is held constant, then GDP
will fall by about:
A) zero.
B) $25 billion.
C) $75 billion.
D) $100 billion.
In a time of inflation when the real (i.e., deflated) value of the government debt is
constant, then the conventionally:
A) reported government budget will show a deficit equal to the inflation rate times the
outstanding debt.
B) reported government budget will show a deficit equal to less than the inflation rate
times the outstanding debt.
C) reported government budget will be balanced.
D) measured government budget will show a surplus equal to the inflation rate times
the outstanding debt.
Starting from a small open economy with balanced trade, if large foreign countries
increase their domestic government purchases, this policy will tend to increase:
A) investment in the small open economy.
B) saving in the small open economy.
C) exports by the small open economy.
D) imports by the small open economy.
Survey evidence indicates that economists worry ______ the general public does about
prices increasing more rapidly than their incomes.
A) more than
B) less than
C) about the same as
D) more intensely than
If the price index for capital goods is the same as the price index for other goods, an
index of the real cost of capital for investment, in the absence of taxes, may be
summarized as the:
A) nominal interest rate plus the depreciation rate.
B) real interest rate plus the depreciation rate.
C) purchase price of a capital good multiplied by the sum of the nominal interest rate
plus the depreciation rate.
D) purchase price of a capital good multiplied by the sum of the real interest rate plus
the depreciation rate.
In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of
income:
A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases, but by less than 250.
If a U.S. corporation purchases a product made in Europe and the European producer
uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______
and net capital outflows ______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Recent research by Laibson and other economists recognizes the importance of
incorporating ______ effects into the study of consumer behavior.
A) technological
B) meteorological
C) environmental
D) psychological
In the IS“LM model when taxation increases, in short-run equilibrium, the interest rate
______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Of the following comments related to equilibrium level in an IS-LM model, which best
denotes the logical causality, and why?
A. The goods and services market as denoted by IS curve gives an equilibrium level of
Y, which when posited in theLM curve gives the equilibrium level of r.
B. The goods and services market as denoted by the IS curve gives an interest rate as a
function of Y which helps solve for equilibrium in the money market.
C. The equilibrium rate of interest as determined by the demand for real balances for a
given level of money supply in the money market helps determine the equilibrium level
of investment that finally helps reach an equilibrium level of income.
In the Keynesian-cross model, actual expenditures differ from planned expenditures by
the amount of:
A) liquidity preference.
B) the government-purchases multiplier.
C) unplanned inventory investment.
D) real money balances.
The Solow residual will fall even if technology has not changed if there is:
A) population growth.
B) endogenous growth.
C) labor hoarding.
D) balanced growth.
An increase in the elderly population of a country affects fiscal policy most directly
because:
A) the elderly generally are not required to pay taxes.
B) governments provide pensions and health care for the elderly.
C) the elderly favor high interest rates on their savings.
D) governments spend more on education as the proportion of the elderly increases.
Assume that the money demand function is (M/P)d = 2,200 ” 200r, wherer is the
interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the
price level is fixed and the supply of money is raised to 2,800, then the equilibrium
interest rate will:
A) drop by 4 percent.
B) drop by 2 percent.
C) drop by 1 percent.
D) remain unchanged.
Equilibrium levels of income and interest rates are ______ related in the goods and
services market, and equilibrium levels of income and interest rates are ______ related
in the market for real money balances.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively
In the Solow growth model with no population growth and no technological progress,
the higher the steady capital-per-worker ratio, the higher the steady-state:
A) growth rate of total output.
B) level of consumption per worker.
C) growth rate of output per worker.
D) level of output per worker.
If the investment demand function is I = c ” dr and the quantity of real money
demanded is eY ” fr, then fiscal policy is relatively potent in influencing aggregate
demand when d is ______ and f is ______.
A) large; small
B) small; small
C) small; large
D) large; large
Which of the following would be represented by a positive value of the random demand
shock, et?
A) an irrational wave of optimism among investors
B) a decrease in government spending
C) an aggressive increase in oil prices by a cartel
D) an increase in the central bank’s inflation target
Prescott interpreted fluctuations in the Solow residual as evidence that:
A) technology shocks are an important source of short-run economic fluctuations.
B) the Solow growth model does not converge to a steady-state equilibrium.
C) endogenous growth models are better explanations of growth than the Solow model.
D) the marginal product of labor fluctuates more than the marginal product of capital.
The percentage of workers who belong to unions in the United States is approximately:
A) 13 percent.
B) 23 percent.
C) 33 percent.
D) 53 percent.
The relationship between short-run aggregate supply curves and Phillips curves is that
there:
A) is no relationship between short-run aggregate supply curves and Phillips curves.
B) are several short-run aggregate supply curves for each Phillips curve.
C) are several Phillips curves for each short-run aggregate supply curve.
D) is exactly one Phillips curve corresponding to each short-run aggregate supply
curve.
If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per
person grew by approximately ______ percent.
A) 2
B) 3
C) 4
D) 8
Reducing the money supply ______ nominal interest rates in the short run, and ______
nominal interest rates in the long run.
A) produces no change in; raises
B) raises; produces no change in
C) raises; lowers
D) lowers; raises
The introduction of a stylish new line of Toyotas, which makes some consumers prefer
foreign cars over domestic cars, will, according to the Mundell”Fleming model with
fixed exchange rates, lead to:
A) a fall in income and net exports.
B) no change in income or net exports.
C) a fall in income but no change in net exports.
D) no change in income but a fall in net exports.
If the per-worker production function is given by y = k1/2, the saving ratio is 0.2, and
the depreciation rate is 0.1, then the steady-state ratio of output per worker (y) is:
A) 1.
B) 2.
C) 3.
D) 4.
The model of the steady-state rate of unemployment assumes that the size of the labor
force is fixed. If the size of the labor force is allowed to vary:
a. explain how the job-loss and job-finding processes will differ from the situation when
the labor force is fixed.
b. explain how interpretations of changes in the unemployment rate will become less
clear?
Assume that Jeannie Drago is trying to allocate her consumption over two periods of
life: work and retirement. Each period is to last 20 years. To simplify, assume that all
income comes at time t1 in the middle of 20 years of work, and all expenditures come at
either t1 or t2, 20 years later. Jeannie’s budget constraint is C1 + C2/(1 + r/100) = Y1 +
Y2/(1 + r/100), where the real interest rate r is 100 percent (approximately 3.5 percent
per year over 20 years). Jeannie’s preferences are to have equal consumption each
period.
a. What are C1 and C2 if Y1 = 1 million and Y2 = 0?
b. What are C1 and C2 if Y1 = 0 and Y2 = 1 million (reflecting, for example, an
individual who plans to come into a large inheritance late in life)? Do these answers
depend on Jeannie’s being able to borrow against the inheritance?
Holding other factors constant, the decline in aggregate income during a recession will
______ the price of housing and ______ the flow of residential housing investment.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease