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An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse
supply shock in both Country A and Country B. Both countries were in long-run
equilibrium at the same level of output and prices at the time of the shock. The central
bank of Country A takes no stabilizing policy actions. After the short-run impacts of the
adverse supply shock become apparent, the central bank of Country B increases the
money supply to return the economy to full employment.
a. Describe the short-run impact of the adverse supply shock on prices and output in
each country.
b. Compare the long-run impact of the adverse supply shock on prices and output in
each country.
The lag between the time that economic stimulus is needed and the time that a tax cut is
passed by Congress is an example of a:
A) fiscal inside lag.
B) fiscal outside lag.
C) monetary inside lag.
D) monetary outside lag.
In a small open economy, policies that increase:
A) investment tend to cause a trade surplus.
B) investment tend to cause a trade deficit.
C) saving do not affect the trade balance.
D) saving tend to cause a trade deficit.
When drawn on a graph with income along the horizontal axis and the interest rate
along the vertical axis, the IS curve generally:
A) is vertical.
B) is horizontal.
C) slopes upward and to the right.
D) slopes downward and to the right.
The home that would have the highest mortgage payment on a 30-year fixed-rate
mortgage would be a home with a mortgage of:
A) $200,000 at 8 percent.
B) $100,000 at 12 percent.
C) $100,000 at 8 percent.
D) $200,000 at 12 percent.
Which of the following is the best example of structural unemployment?
A) Tim is looking for a job with flexible hours but has not been offered one yet.
B) Vickie lost her job as a graphic artist at a movie studio because she did not have
training in computer-generated animation.
C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry
have limited the number of jobs available.
D) Fatima lost her job at a packing plant but has not looked very intensively for a new
job because she still has 2 months of unemployment insurance benefits left.
If Tobin's q is greater than 1, then managers should:
A) increase the capital stock of the firm.
B) maintain the existing capital stock of the firm.
C) allow inventories to run down.
D) decrease the capital stock of the firm.
Exhibit: Saving and Investment in a Small Open Economy
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy,
if the world interest rate is r3, then the economy has:
A) a trade surplus.
B) balanced trade.
C) a trade deficit.
D) positive capital outflows.
During recessions, investment spending usually decreases because:
A) the real interest rate falls.
B) lower profits mean more firms face financing constraints.
C) the purchase price of capital decreases.
D) corporate tax rates usually decrease.
In the Fisher two-period model, if the consumer is a saver, consumption in periods one
and two are normal goods, and the income effect of an increase in interest rate is less
than the substitution effect, then saving:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.
The allocation of resources between those who want to save and those who want to
borrow is accomplished through:
A) the velocity of money.
B) fiscal policy.
C) the financial system.
D) foreign trade.
Private saving is:
A) income minus consumption minus government spending.
B) disposable income minus consumption.
C) disposable income minus government spending.
D) taxes minus government spending.
Suppose that the large industrial countries of the world are concerned about the
depreciating currencies of a number of small open economies.
a. What type of fiscal policies must the large industrial countries undertake in order to
promote currency appreciation in the small open economies?
b. Illustrate graphically the impact of the industrial countries' policies on the exchange
rate of the small open economies.
c. What will happen to the trade balance of the typical small open economy, assuming
that it starts from a position of balanced trade?
Graphs that illustrate the time paths of endogenous variables when a shock hits the
economy are called:
A) monetary policy paths.
B) dynamic shock figures.
C) impulse response functions.
D) endogenous growth models.
A policy that decreases the job separation rate _____ the natural rate of unemployment.
A) will increase
B) will decrease
C) will not change
D) could either increase or decrease
In the Solow growth model of Chapter 8, the demand for goods equals investment:
A) minus depreciation.
B) plus saving.
C) plus consumption.
D) plus depreciation.
Macroeconomic models:
A) assume all wages and prices are sticky.
B) assume all wages and prices are flexible.
C) make different assumptions to explain different aspects of the macroeconomy.
D) focus primarily on the optimizing behavior of households and firms.
In Irving Fisher's two-period model augmented by a borrowing constraint, an example
of a consumer for whom the borrowing constraint might likely be binding would be:
A) a college student.
B) a college student's parent.
C) a college professor.
D) the president of a bank.
Exhibit: AD"AS Shifts
(Exhibit: AD"AS Shifts) Starting from long-run equilibrium at A with output equal to
and the price level equal to P1, a cost-push inflation would be represented by a shift
from:
A) AD1 to AD2
B) AD1 to AD3
C) AS1 to AS2
D) AS1 to AS3
The rate of growth of labor productivity (Y/L) may be expressed as the rate of growth of
total factor productivity:
A) plus the capital share multiplied by the rate of growth of the capital"labor ratio.
B) minus the capital share multiplied by the rate of growth of the capital"labor ratio.
C) plus the rate of growth of capital productivity.
D) minus the rate of growth of capital productivity.
To increase the money supply, the Federal Reserve:
A) buys government bonds.
B) sells government bonds.
C) buys corporate stocks.
D) sells corporate stocks.
In each case identify whether the situation is a case of adverse selection or moral
hazard. Explain.
a. Jasper knows, but the car rental company does not know when he is trying to rent a
car during a blizzard in Wisconsin, that Jasper grew up in a tropical climate and has no
idea how to drive in cold weather and snowy conditions.
b. Joan has received a loan from the bank to finance the purchase of more inventory for
her quilt shop, but she intends to use the money (without telling the bank) to take a
safari in Africa.
c. Some companies sell annuities, which are policies that make periodic payments as
long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity
issuers do not know, that people in Jane's family routinely live to age 100.
The labor force equals the:
A) adult population.
B) number of employed individuals.
C) number of unemployed individuals.
D) number of employed and unemployed individuals.
According to the quantity theory and the Fisher equation, if the money growth increases
by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate
will increase:
A) 2 percent.
B) 3 percent.
C) 5 percent.
D) 6 percent.
A tax cut shifts the ______ to the right, and the aggregate demand curve ______.
A) IS; shifts to the right
B) IS; does not shift
C) LM: shifts to the right
D) LM; does not shift
Which of the following is an example of frictional unemployment?
A) Dave searches for a new job after voluntarily moving to San Diego.
B) Elaine is willing to work for less than the minimum wage, but employers cannot hire
her.
C) Bill is qualified and would like to be an airline pilot, but airlines do not find it
profitable to hire him at the wage established by the airline pilot's union.
D) Joan is willing to work at the going wage, but there are no jobs available.
Exhibit: Saving, Investment, and the Interest Rate 1
(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in
equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals
desired investment, I1. What will be the new equilibrium combination of real interest
rate, saving, and investment if the government increases spending, holding other factors
constant?
A) Point A
B) Point B
C) Point C
D) Point D
Assume that the production function for an economy is given by Y = AKaHbL1"a"b,
where H is the stock of inventories. Then the marginal product of inventories (MPH) is
given by MPH = bAKaL1 "a"bHb" 1. If the stock of inventories does not depreciate, the
price of inventories is the same as the price of output, and taxes are ignored, then the
real "cost of capital" for inventories is just the interest rate r.
a. Derive an expression for the "desired equilibrium stock of inventories" (H*) as a
function of r and output Y by equating the cost of capital to MPH. (Hint: First substitute
the production function into the expression for MPH to get MPH = bY/H.) If r = 0.1, b
= 0.05, and Y = 5,000, what is the desired stock of inventories?
b. If r rose to 0.12, how would the desired stock of inventories change?
To the extent that risky mortgage-backed securities that were sold to buyers who were
not fully aware of the risks contributed to the financial crisis of 2008"2009, blame for
this action lies with:
A) homebuyers.
B) mortgage brokers.
C) investment banks.
D) the Federal Reserve
In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in
bank accounts. This action would be expected to ______ the currency"deposit ratio and
______ the money supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
The costs of reprinting catalogs and price lists because of inflation are called:
A) menu costs.
B) shoeleather costs.
C) variable yardstick costs.
D) fixed costs.
The standard model of business fixed investment is called the ______ of investment.
A) new classical model
B) neoclassical model
C) classical model
D) Keynesian model
In a large open economy, the interest rate adjusts so that domestic saving equals:
A) domestic investment.
B) net exports.
C) net capital outflow.
D) domestic investment plus net capital outflow.
